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We maintain our BUY recommendation on ITC with Jun-24E target price of Rs525/share, as we see firm structural prospects. From the core cigarette business perspective, we expect rational tax hikes ahead, given higher share of the ad-valorem component leading to build-up of volumes, which along with improving mix would aid a high-single-digit EBIT growth. In non-cigarette operations, we continue to see profitable growth and improving return profile, where segments are self-sufficient to address their growth needs. Amid the enhanced demand setting in F&B, Agri export and Paper, we see execution to be key. We continue to see ahead-of-time capex as a business moat, which enhances the company’s structural prospects. Value unlocking in Hotels operations remains a near-term catalyst.

Cigarette: EBIT growth momentum crucial for valuation

We see that stock value re-rating has been a factor of faster recovery in the Cigarette business EBIT (~19% CAGR over FY21-23), which has benefitted from the double-digit volume growth momentum (~17% CAGR over FY21-23) on a weak base. Going ahead, we see EBIT growth moderating, albeit remaining relatively better at a high-single-digit over FY23-26E vs 2% CAGR over FY16-21 (industry saw sustained double-digit tax hikesduring FY13-18). We see tailwinds from: i) the higher ad-valorem component in taxation limiting the need for any sharp tax hikes, ii) connect with youth with innovative formats, iii) fortified portfolio driving legal volumes, and iv) improving sales mix with gradual consumer up-trade. Probability of a tax increase remains the key headwind.

Non-Cigarette businesses self sufficient to fund structural growth

We believe bulk of the investments across non-cigarette segments are in place, except sustained needs in the paper business. Most heartening is the self-sufficiency across segments leading to funding own growth needs. For FY23, all businesses retained the healthy growth, with sales/EBITDA YoY growth at 20%/35% for ‘Other FMCG’, 19%/25% for Paper, 12%/25% for Agri, and expansion of 2x/11x for Hotels. We see profitable growth ahead, with 11% sales CAGR and 13% EBITDA CAGR over FY23-26E. Structural prospects remain firm in Agri, where inter-segment sales are now at 32% (non-tobacco salience in external sales is 78%). Similarly for the Paper business, sales stand at 20%.

Healthy business recovery aided a re-rating; we maintain BUY; TP: Rs525/sh

ITC’s valuation re-rating has been a factor of the conducive setting in the cigarettes business and profitable growth across other segments. We maintain a positive outlook, and see a K-Shaped recovery in ITC’s ‘Other FMCG’ business. Value unlocking in Hotels operations is a near-term catalyst. We maintain BUY with SoTP-based TP of Rs525. Key risks to our call: a) sharp tax hikes for cigarettes, b) entry into the low-margin/longgestation categories, c) overhang from the GoI’s SUUTI stake sale.

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