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Solid recovery led by cigarettes and paperboards; improving outlook; reiterate BUY

Result Highlights

* Result summary – Revenue growth of 37% YoY led by cigarettes/paperboards and steady performance from FMCG and Agri business. EBITDA margin contracted by 90bps QoQ however improved by 300bps YoY due to operating leverage. The margin is still below pre‐Covid levels owing to inflation in input cost. Subdued margin together with lower other income resulted from lower market yields translated into PAT growth of 29% on 26% decline in base quarter.

* Segmental performance – Cigarettes saw 32.9% revenue and 36.7% EBIT growth, FMCG saw 10.4% revenue and 38.3% EBIT growth, hotels saw 5.6x jump in revenue on Covid‐led washout in base quarter and loss of Rs 1515mn at EBIT level, agribusiness saw 9.2% revenue and 9.5% EBIT growth and paper saw 54.2% revenue growth with massive 145% EBIT growth due to operating efficiency.

* Other highlights – Cigarette volume growth of around 32% with pricing/mix constituent deteriorating to 1% marginal with 180bps surge in EBIT margins, FMCG continued strong sequential momentum with discretionary/OOH impacted by 2nd wave and normalization in staples/foods while margins expand by 100bps to 4.7%, hotel losses reduce, paper margins reached record levels of 25% while agribusiness margins were flat at 4.8%.

Valuation and view 

Overall strong quarter performance with beat on revenue while margins remain well below normal as input cost pressures continue to derail operating performance. Cigarette volumes were up ~32%, a continuation of sequential improvement coupled with some deterioration in mix as well. We expect low double‐digit growth in cigarettes from a favorable base and normalized growth rates in agribusiness and FMCG, in addition to margin improvement especially in cigarettes with positive operating leverage and a better mix. Hotels business should improve steadily while Paper business margin reinforces confidence in ITC’s focus to enhance competitiveness. ITC’s FY21 dividend payout ratio reached 100%, which has kept dividend yield for the stock ~5%. We build in 8%/10%/9% revenue/EBITDA/PAT CAGR for the company over FY21‐24E.

We reiterate our BUY rating and a TP of Rs 283 based on 20x FY24E earnings, a significant discount of 50‐60% to sector peers and a 15% discount to its own long‐term average multiple. We also believe concerns on ESG and FMCG business growth/margin trajectory are overdone. A favorable outlook and gradually improving capital allocation are setting a good backdrop for the stock to finally start performing and begin the long‐awaited re‐rating journey. The cheap valuations, strong volume growth outlook for cigarettes in 2HFY22 given low base and benign taxation and strong cash flow yield of 6% provide strong downside support.

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