IGI Logo

Cigarette volumes deliver positive surprise, boost margins

* ITC’s sales growth momentum was better than expected across businesses in 2QFY23. Estimated Cigarette volume growth of 21% YoY was a positive surprise and resulted in a three-year volume CAGR of 5.1%. The higher-thanexpected contribution from the high-margin Cigarettes business resulted in a 250bp beat on our EBITDA margin estimates, which came in at 36.4%.

* As highlighted in our upgrade to Buy note as well as our FY22 annual report note, strong earnings momentum (18% EPS CAGR over FY22-FY24 v/s ~5% in the preceding five years) is being driven by healthy performance from Cigarettes in a stable tax environment, strong recovery in Hotels business profitability, and continued good performance of FMCG-Others. Allied with better capital allocation and continued healthy dividend payouts, the path towards high 20’s/early 30’s RoE is visible. We assign a 22x EPS multiple and roll forward to Sep’24E earnings. Maintain BUY with a TP of INR400.

Sales in line; margin beat on higher Cigarette contribution

* ITC’s 2QFY23 net revenue was up 26.7% YoY to INR161.3b (est. in-line), EBITDA grew 27.1% YoY to INR58.6b (est. INR53.6b), PBT rose 21.7% YoY to INR59.4b (est. INR56.4b), while adj. PAT grew 20.8% YoY to INR44.7b (est. INR42.2b).

* Gross margin contracted 20bp YoY to 57% (est. 53.3%) while EBITDA margin remained flat YoY at 36.4% (est. 33.9%) in 2QFY23.

* Cigarette volumes likely to have increased 21% YoY in 2QFY23 (est. +13%). The volume growth in the base quarter was 9%; however, three-year volume CAGR stood at 5.1%. Net Cigarette sales grew 22.9% YoY to INR59.2b (est. INR54.8b). Net Cigarette EBIT margin expanded 40bp YoY to 74.8%.

* FMCG-Others sales grew 21% YoY to INR48.8b. EBIT grew 17.9% YoY to INR3.2b in 2QFY23.

* Agri business sales grew 44% YoY to INR40b.

* Paperboards grew 25% to INR22.9b.

* Hotels business grew 81.8% to INR5.4b.

* Other income was down 25.1% YoY to INR5.1b.

* 1HFY23 net sa

*A stable tax environment for Cigarettes in recent years has allowed ITC to calibrate price increases to avoid a disruption in demand. We expect this trend to continue, which should result in improved Cigarette volumes and earnings visibility over the medium term.

*Valuations of global Tobacco peers have been restored to their pre-pandemic levels (Jan'19), and while ITC’s multiples have followed the same trend, it still trades at a 10% discount to its Jan'19 valuations of 25.4x one-year forward EPS. We assign a 22x EPS multiple and roll forward to Sep’24E earnings. The stock has done well with ~33% gain since our upgrade to Buy call in Jun’22 and we believe there is further scope for upside based on its healthy earnings outlook. Maintain BUY with a TP of INR400.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer