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We hold a positive stance on ITC, heartened by its improved management execution, ahead-of-time investment in businesses, and leadership position in most segments. Overall revenue fell 8% in Q1, while growing 11% adjusted for Agri revenue; Cigarettes net sales grew 11% (volume growth estimate: ~8%) and Other FMCG sales growth was a healthy 16%. Cigarettes EBIT grew 11% YoY (as it navigates margin pressure well), with EBIT margin at 74.2%, up by ~20bps YoY. Other FMCG EBITDA margin stands at 11%, up by 375bps YoY (PLI benefit: 30-40bps). We see double-digit EBIT growth for Cigarettes and healthy EBITDA expansion for the Other FMCG segment, going forward. We uprear our earnings estimates for Cigarettes by 3%, on better pricing power/margins; this hoists our SOTP-based Jun-24E TP to Rs535/share (vs Rs525 earlier).

Cigarettes volume likely grew ~8%; EBIT growth sustained double-digit level

ITC’s cigarettes gross sales grew 13% YoY, while net sales growth stood at 10.9%. We now estimate cigarettes vol. growth at ~8% YoY (marginally better than our expectation of 7%). The company saw decent performance in differentiated variants launched recently. With the 3% price and mix growth, we see accelerated premiumization in the portfolio. As per our checks, the company now has ~70% share in the capsule segment. Cigarettes EBIT grew 11% YoY, aided by EBIT margin expansion of ~20bps YoY to 74.2%. With high single-digit net sales growth, we see 10% EBIT CAGR over FY23-26E.

Non-Cigarettes performance subdued, on a high Agri base; Paper: weak show

Non-Cigarettes revenue fell 8% YoY, hit by the 27% decline in Agri revenue. Adjusted for Wheat exports in the base, non-Cigarettes revenue grew 17% YoY with 31% growth in Agri. Overall, non-Cigarettes business EBIT grew 15% YoY, aided by 200bps expansion in EBIT margin to 10.2%. Other FMCG business maintained its strong run, with 16% YoY revenue growth. Other FMCG EBITDA grew 64% YoY, with 325bps expansion in segment EBITDA margin to 11% (PLI benefit: 30-40bps). The Paper business put up a muted show, with 6.5% revenue decline (weak demand and low-priced supplies from China) and 23% EBIT decline (EBIT margin down by 475bps YoY to 22.3%). Hotels revenue grew 8% on a high base; EBIT grew 17% with EBIT margin at 22% (+165bps YoY). ITC Infotech revenue grew 12% YoY to Rs8.4bn, with OPM at 13.6% (down 220bps YoY).

Better execution to aid earnings and valuation; maintain BUY

We believe the stock re-rating has been a factor of healthy EBIT growth in Cigarettes and strong recovery in the non-Cigarettes business. On a normalized base, we perceive that better execution would help the company outgrow the industry and drive profitability in its businesses. The Board of Directors has approved the Hotel demerger, with share entitlement ratio of 10:1 for the demerged entity, wherein for every 10 shares of ITC, shareholders will get one share of the new entity. We see this as a positive move for keeping the share price considerable; maintain BUY.

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