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Mixed quarter; agribusiness bump‐up offsets soft cigarettes performance

Result Highlights

* Result summary – Gross and net revenue growth of 24.1% and 21.3% yoy led by strong growth in agribusiness and sequential recovery in other segments, EBITDA growth of only 7.4% with margin decline of 480bps to 33.6% given lower EBIT margins in cigarettes and agribusiness and losses in hotels, PBT growth 7.6% and PAT decline of 1.3%.  

* Segmental performance – Cigarettes saw 14.2% revenue and 7.7% EBIT growth, FMCG saw 15.8% revenue and 28.5% EBIT growth, hotels saw 38% revenue decline and loss of Rs 400mn at EBIT level, agribusiness saw 78.5% revenue and 54.2% EBIT growth and paper saw 13.1% revenue growth with 8% EBIT decline.

* Other highlights – Cigarette volume growth of around 8% with pricing/mix constituent deteriorating to 6% driving a 370bps dip in EBIT margins, FMCG saw recovery on discretionary segments with 23% growth and normalization in staples/foods/hygiene segment with 13% growth while margins expand by 50bps to 5.1%, hotel losses reduce, agribusiness margin lower due to inferior mix while paper margins flat.

Valuation and view –

We would rate ITC’s 4Q performance as mixed with revenues delivering a positive surprise while margin performance was disappointing. Cigarette volumes were up ~8%, a continuation of sequential improvement but still below pre‐COVID levels, coupled with some deterioration in mix as well. While May has been impacted by the lockdowns but should still be relatively better than last year given restricted store operations. FMCG growth was in‐line given that the momentum of staple/foods/hygiene categories is now normalizing and discretionary categories are recovering.

The bump‐up seen in agri business led by wheat exports should normalize and hotels and paper business should steadily keep improving. Hotels getting into positive EBITDA and FMCG business keeping up the margin growth trajectory were other positives. ITC’s FY21 dividend payout ratio reached 100%, which has kept dividend yield for the stock ~5%. We build in 9% revenue and 14% EBITDA and PAT CAGR for the company over FY21‐23E led by 11% volume 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.

We assume coverage on the stock with a BUY rating and a TP of Rs 266 based on 20x FY23E earnings, a significant discount of 50‐60% to sector peers and a 15% discount to its long‐ term average multiple. We also believe concerns on ESG and FMCG business growth/margin trajectory look overdone. While valuation remains cheap for the stock, the stock can continue to remain range bound for now given lack of positive triggers either on growth or corporate action. But cheap valuations, strong volume growth outlook for cigarettes in FY22 given low base and benign taxation and strong cash flow yield of 6% provide strong downside support.

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