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Business Overview

ITC being a leader in the cigarette industry enjoys complete monopoly. It’s business is built around consumption categories such as cigarettes, staples and value add foods, personal care, value add paper, stationary, agri commodities and hotels

The FMCG business continues to scale up; it is second largest listed player in India.

Though policy makers are committed to cut tobacco consumption, the unpredicted tax incidences remains key over hang for the company..

Given this, earnings for the company remain volatile (no linear taxation), yet its focus on FMCG could balance.

Investment thesis

Within FMCG segment foods contribute ~82% to revenues, and food being largest consumption category ITC’s focus on packaged food holds huge growth potential. Its strategy is driven by (1) building distribution scale (2) focus on efficiency and scale to drive margins (12%+) and (3) create agile and efficient supply chain.

With fading effect of Covid we expect recovery in demand for OOH consumption, Hotels, Paper board, yet agri export remains more opportunist for the company.

Benign tax ruining in the recent Union Budget coupled with focus on bridging price/product (NPD) could lift cigarette volumes. We believe company would take 5- 6% price increase in the cigarette portfolio post March, as demand stabilizes.

We expect with overall demand improvement and scale could lift margins for cigarette as well as other businesses.

Key Triggers

Near term: gradual turnaround in FMCG to drive EBITDA margins from 8% to 13% in two years.

Near term: growth in Cigarette volume with improved consumer mobility.

Focus on using data analytics to aid distribution, optimize supply chain and smart manufacturing extracting operating leverage.

ITC trades at a discount to 5-year average, given improved ESG scores, attractive valuation and ~5% dividend yield we expect sharp re-rating soon.

Valuation

We believe benign tax ruling in the recent Union budget, coupled with new products driving Cigarette could drive volumes; Further, company announced interim dividend of Rs5.25/share. Stable taxation and reasonable valuations make the stock more attractive and set for re-rating.

We have a BUY rating and DCF-based target price of Rs341 (implying 23.3x FY24E EPS

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