IGI Logo

ITC’s Q3FY23 delivered stable performance (though impacted by lower agri exports); revenue/ EBITDA/ PAT grew 2.5%/23.3%/21.0%. Cigarette saw strong volume/EBIT growth of 15.0%/ 16.9%. More importantly, the volume recovery from illicit trade on the back of stable taxation and product innovation to continue. FMCG revenue/EBIT grew 18.4%/43.9%, led by staples and convenience foods with rapid growth in MT/E-com. Hotels/Paper segment revenue/EBIT grew 50.5%/29.0% & 12.7%/26.3%. Agri business cut by 37.1%. Gross margin improved to 58.5% (+773bp). FMCG EBITDA margin surged at 10.0% led by price increases and ~7% volume growth. We expect FMCG to deliver strong EBITDA with better operating leverage and improved product-mix. Further, increase in NCCD tax by 16.0% would have limited impact on cigarette margins. With higher FMCG/Cigarette revenues, we tweak earnings and maintain strong BUY, with a revised DCF-based TP of Rs470 (implying 28.5x avg. FY24/FY25E EPS). All segments firing well excluding Agri; Strong execution delivered 184% growth in FMCG

ITC’s refresh strategy across business verticals places digital process and sustainability at its centre to create nimble organisation adapting changes meeting fast-evolving consumer preferences and consumption patterns. That said ITC’s FMCG-foods scale-up has all ingredients to drive a long-term trajectory. We note it covers ~+7mn outlets and its direct coverage increased 2x YoY. Moreover, stability in taxation, successful product innovation and execution in cigarettes division resulted in 15.0% volume growth, We believe the business is now rightfully in a good position to raise prices when needed. Further, improved operating metrics on the back of strong occupancy rate and with +20% ARR we expect Hotels business demerger to gain momentum. Paper business demand was fuelled by end-user segments and exports. The company is investing in value-add-paper capacity. Agri. Business cut by 37.1% due to impact of restrictions imposed on wheat and rice exports. ITC is now escalating its strategic sourcing for branded packaged foods to scale up value-added products portfolio.

FMCG-Foods business shaping up well; expect 8% EBIT soon; Cigarettes EBIT grew 16.9%

As highlighted in our note, with strong revenue growth in foods portfolio (+20%), FMCG segment saw EBITDA/EBIT margins at 10.0%/7.2% driven by strategic cost management, premiumisation, supply chain agility and judicious pricing. We expect double-digit EBIT growth for cigarettes in FY23, yet FMCG EBIT margin to inch-up to 8.0% in Q4. On the back of 15.0% volume growth Cigarette delivered EBIT growth of 17.9% and we expect sustained volume growth in Q4 as well. Hotel/Paperboard/Agri reported improved EBIT margin at20.5%/26.3%/12.5% driven by operating leverage and structural cost interventions.

Valuation and risks

We believe with steady prices the legal industry has been able to cut illegal cigarettes, as well as imports to accelerate double digit growth. Further, normalised consumer activities despite higher inflation RSFT segment saw strong demand. Further, FMCG EBITDA/EBIT at 10%./7.3% came in-line as per our prediction two years before. We believe, change in NCCD rateannounced in the recent budget may have limited impact on overall profitability. ITC has announced first interim dividend of Rs6/ per share. Considering strong performance, we have increased FY23E/FY24E earnings by 6.5%/9.1% and retain BUY, with a DCF-based TP of Rs470 (implying 28.5x avg. FY24/FY25E EPS). Risk: rising competitive intensity in cigarettes

To Read Complete Report & Disclaimer Click Here

For More Centrum Broking Disclaimer https://www.centrumbroking.com/disclaimer/

SEBI Registration No.:- INZ000205331

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