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Recovery on track

* ITC reported in-line Q4 performance with EBITDA/PBT growth of 7%/8% to Rs44.7bn/ Rs48.5bn. PAT fell 1% due to low ETR in Q4FY20. Cigarette recovery was on track with sales/EBIT up 7%/8%. FMCG EBITDA growth at 19% was lower due to a decline in ESPB.

* Cigarettes will be impacted again in Q1, but the overall impact is expected to be lower vs. last year, and category trends indicate a full recovery as unlocking starts. Stable taxation and ITC’s increased portfolio/market interventions are likely to drive further recovery.

* Excluding ESPB, FMCG organic sales grew 16% with comparable EBITDA margin up 115bps (reported margins up 30bps). ESPB impact was higher due to a sharp fall in the peak quarter on account of schools being shut. Stronger pace of new launches, inorganic opportunities and recovery in ESPB should help sustain strong growth and margin gains.

* We cut FY22E/23E EPS by 8%/3%. We expect earnings to improve with full unlocking and estimate 12%/17%/10% earnings growth in FY22/23/24. Valuations at 15x can offer upsides with improvement in growth. Retain Buy with a TP of Rs265 (18x Jun’23 EPS).

Cigarette sales grow 6.7%; volumes returning to pre-Covid levels:

Cigarette net sales grew 6.7% (post excise adjustments~) with higher volume growth. Q4 volumes further improved to near pre-Covid levels. EBIT margins expanded 70bps, driven by cost control measures. Cigarettes sales were stronger in Jan-Feb’21 but were impacted in Mar’21 due to disruptions from the second Covid wave. ITC has continued to step up its portfolio and market interventions with the launch of innovative offerings and addressing the price point gaps, helping it to further strengthen its leadership. Cigarettes will be hit in Q1 due to the lockdowns but the overall impact should be lower vs. last year, in our view. Stable taxation and reopening of the economy should support growth in cigarette sales/volumes ahead.

Excl ESPB, FMCG performance on track:

FMCG organic sales, excluding ESPB, grew 16%, with Staples, Convenience Foods and Health & Hygiene products growing 13%. Sales in the discretionary segment recovered with 23% growth. Reported sales increased 16%, aided by Sunrise merger. EBIT margin improvement was slightly below expectations, with EBITDA margin up only 30bps to 8.3%. Excluding ESPB and Sunrise, comparable margin were up 115bps. Besides inorganic growth, the year saw a significant step-up in the pace of new launches, aiding overall FMCG growth of 15%. The Agri business grew 79% on better export opportunities. Paper grew 14% with similar EBIT growth. Hotels grew 23% in sales QoQ; 38% decline yoy. EBIT loss narrowed to Rs400mn.

Recovery in line; expect further improvement post Q1:

We expect Q1 performance to be impacted by lockdowns, hence we cut FY22E/23E EPS by 7.6%/2.8%. The overall recovery seems on track and we expect better growth on full reopening. Valuations at 15x are in line with global peers and can offer upsides with improving growth. Retain Buy with a TP of Rs265, based on 18x Jun’23E EPS.

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