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An inline print with good recovery in cigarettes and hotels

Cigarette volume rose ~8% YoY (2-year CAGR: -1%) in 4QFY21 (our view) with recovery to nearly pre-Covid levels towards the end – this should allay a lot of consensus concerns. FMCG business grew by 16% YoY (~6% on 2-year CAGR basis). Focus on portfolio fortification (120+ launches in the year), small packs, augmented distribution may potentially help ITC to outperform industry growth in FY22. FMCG EBITDA margin expansion of 180 bps (comparable for FY21) to 8.9% was decent. We see (1) potential market share gains (cyclical share gain era of VST and GPI may be coming to an end), (2) FMCG scale up and profitability improvement to continue and (3) potential to accelerate cost savings through a supply chain recast. Healthy pay out with full-year dividend of Rs10.75/share. Reiterate ADD; TP Rs240.

Cigarette volume grow 8%:

Company revenue was up 23% while EBITDA was up 7% YoY; PAT was down 1% YoY. Cigarette gross revenues grew 14% YoY, with volume growth of 8% (2-year CAGR: -1%) as volumes recovered to near pre-Covid levels (towards the end) with easing restrictions. Cigarettes EBIT was up 8% YoY to Rs36.7bn. Sequential recovery was primarily driven by metros and large town markets on the back of progressive easing of restrictions and enhanced mobility. ITC strengthened its supply chain by (1) strengthening direct reach in target markets, and (2) augmenting stockist network in rural/semi‐urban markets.

FMCG profitability expansion continued but at a moderated pace:

FMCG revenues grew 16% YoY (2-year CAGR: 6%) on a reported basis. Adjusting for the Lifestyle retailing business restructuring, Sunrise acquisition and stationery products (impacted due to closure of educational institutes), revenue grew 16% on a relatively strong base. Staples, Convenience Food and Health & Hygiene products (78% revenue contribution) growth accelerated to 13% (11% in 3Q) while discretionary and out-of-home consumption products further recovered to a 23% growth (from +11% in 2Q). Segment EBIT was up 28% YoY on a reported basis. Adjusted EBITDA was up 36% YoY with margin expansion of 115bps YoY.

Other businesses’ performance recovered sequentially:

Agri business revenue grew 79% on a weak base (driven by trading opportunities in Rice, oilseeds & Wheat and higher supplies to support captive packaged foods business). EBIT margin declined 90bps to 5.6% due to adverse business mix. Hotels business further improved sequentially (+22% QoQ; -38% YoY) due to higher occupancy and pick-up in F&B business – reported Rs0.4bn EBIT loss. Hotel business, after being EBITDA positive in Dec’20, reported an EBITDA of Rs250mn. Paper revenue increased 14% YoY and EBIT was up 13% YoY with a marginal dip in EBIT margins to 19.5%.

Other highlights for FMCG business:

Staples & Convenience foods demand normalised after the initial surge. However, demand for health & hygiene, immunity and Ayurveda products remains strong. Snacks and beverages categories saw a double-digit growth in Q4FY21; there has also been some recovery in deodorants.

Balance sheet and cash flows:

Cash generation was slightly lower due to adverse working capital movement (up to 60 days versus 54 as of Mar’20). Receivables remained flat at 17 days’ while inventory increased by 12 days to 77 days. OCF was down 17% YoY to Rs115bn. Capex of Rs37.6bn included acquisition consideration of Rs21.8bn.

Valuation and risks:

We increased our earnings estimates by 3-4%. Maintain ADD with a DCF-based target price of Rs240. At our target price, the stock will trade at 18x P/E multiple Mar’23E. Key downside risk is tax hikes much ahead of inflation leading to volume pressure (on cigarettes) as price elasticity is still unfavourable.

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