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Well positioned for long term value creation

ITC’s recent price outperformance (+25%) has kept investors gasping, however as argued in our report (Lionheart series) we see potential for ITC to inch-up to new records soon, given: (1) likely potential for price hikes in cigarettes pre-empting next Union budget, (2) strong underlying performance with improved profitability in the Foods portfolio, (3) improving outlook and potential demerger for the Hotel business, and (4) bridging valuation gap. Besides this we note, focus continue on augmenting distribution could scale up FMCG business and expand market share including cigarettes. Nonetheless, we expect benign tax-regime as government is likely now able to better appreciate the legal industry’s logic that a punitive taxation regime on legal cigarettes alone does not necessarily help control use of tobacco in the country, rather causes migration to cheaper forms of tobacco. Given favourable macro and micro conditions we revised earnings introducing FY25Eand maintain strong BUY, with revised DCF-based TP of Rs424 (implying 25.4x avg. FY24/FY25E EPS).

ITC-refreshed strategy to create nimble organisation with digital prowess across segments ITC’s refreshed strategy across business verticals places digital prowess and sustainability at its centre to create nimble organisation adapting changes meeting fast-evolving consumer preferences and consumption patterns. Further, management stated its objective in exploring growth opportunities through the M&A route, allocating capital also to drive exports. Through 10 ICML’s it focuses to improve supply-chain efficiencies by enhancing quality and hygiene, cut distance to market, and reduce emission.

FMCG-Foods business shaping up well; expect double digit EBIT growth in cigarettes in FY23 As highlighted in our note, ITC’s FMCG-foods scale-up has all ingredients to drive a long-term trajectory. We reckon FMCG-Foods now cover ~7mn outlets and its direct coverage increased 40% YoY. Moreover, successful product innovation and democratisation of premiumisation across cigarette segment, we expect ITC to execute selective price hikes (last hike was taken 2 years before). That said, strong volume up-tick and relative stability in taxation, we expect double-digit EBIT growth for cigarettes in FY23, yet FMCG to inch-up +9% EBIT margin soon. Further, with improving operating metrics and bounced back in Hotels business, we expect improved occupancy with +20% ARR resulting in profitable demerger soon. We believe, paper business demand fuelled by end-user segments, though input prices to remain inflationary resulting in strong performance in FY23. ITC-MAARS initiative driving Agri. business promoting ‘Climate-Smart-Agriculture’ focusing on value-add portfolio and select export opportunities.

Valuation and risks

We believe benign tax-regime, coupled with selective price increases, cigarette division to report double digit EBIT growth in FY23. However, FMCG-Foods business scale-up driven by distribution expansion could lift margin trajectory, while performance for Hotels, Agri. and Paper driven by improved economic activities. Given ITC’s refreshed strategy coupled with improved macro and micro environment we expect ITC to outperform its peers. Considering strong performance, we have increased FY23E/FY24E earnings by 6.0%/6.3% and retain BUY, with a revised DCF-based TP Rs424 (implying 25.4x Avg. FY24E/FY25E EPS). Key risks: sharp increase in any form of taxation, higher leaf tobacco prices, and delayed recovery in economy

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