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Strong performance across segments; Maintain Buy

Healthy Q2FY23 numbers: ITC’s reported strong numbers for Q2FY23 wherein net revenue grew by 24.4%, driven by growth across all its segments. Despite cost inflation, its gross and EBITDA margins improved marginally by 10bps and 11 bps, respectively.

Growth continues in Cigarettes business: Cigarettes revenue grew by 22.8% YoY to Rs 7635cr led by volume growth of ~20%+ while margins saw an improvement of ~22bps. Further, stability in taxes, recovery in volumes of legal cigarettes, focus on premium and launch of differentiated products supported the growth. Going ahead, innovation of differentiated products and focus on premium cigarettes will aid in strengthening the portfolio.

FMCG performed well despite inflation pressure: ITC’s FMCG business reported a healthy growth of 21% YoY to Rs 4,894cr, driven by higher demand for staples & convenience foods as well as out of home categories while hygiene products demand was subdued. Also, increase in penetration, last mile execution and ramp-up in outlet coverage supported revenue to increase. Going ahead, ITC’s strategy is to scale up the FMCG segment by new product launches, investing behind building categories, and improving sales from e-commerce.

Firmness in Other businesses: Hotel business grew by 80.2% YoY to Rs 560cr recovery in demand, increase in leisure and business travel. Further, with addition of properties and increasing demand, occupancy rate will rise and lead to better growth going ahead. Additionally, the paperboards business continued its strong performance with growth of 25% YoY driven by strong demand across end-user segments and exports. Ahead, the company’s focus will be on recyclable packing solutions, growing value added products and improving efficiency. Besides, its Agri-Business too witnessed healthy growth of 43.1% YoY to Rs 4038.7cr driven by exports of wheat, rice and leaf tobacco. ITC intends to focus on growing its value added products (Spices, Coffee, Frozen Marine Products and Processed Fruits etc.) and strengthen its rural presence as well as relationship with customers.

Outlook & Valuation: ITC is a well-diversified player across segments like cigarettes, FMCG, Agri, Hotels and paperboards. The company’s vision of diversifying revenue and scaling all businesses is working as per management expectation. We are positive on the long term prospects of ITC, given its strong focus on innovation and premiumization in cigarettes and FMCG businesses. Besides, focus on value added products, increase coverage of outlets and strengthen digital and e-commerce platforms would bode well for future growth. In addition, it is a high dividend paying company plus enjoys debt-free status and generates strong free cash flow as compared to its peers. We have estimated its Revenue/EBITDA/PAT to grow at 10.6%/12.3%/12.5% CAGR over FY22-25E. We have assigned a Buy rating with a revised target price of Rs 411.

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