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Strong delivery in FMCG; cigarettes mostly on expected lines

ITC’s Mar-Q earnings continued to be strong with a very impressive delivery in FMCG on both growth and profitability fronts. Cigarettes performance was mostly on expected lines, with volumes continuing to grow in double-digit helped also by continued clawback from the illicit trade. A very strong growth in FMCG (resumption of education institutions helped) and continued buoyancy in Hotels led to a >60% growth in non-cigarettes EBIT, notwithstanding the weaker-than-expected performance in Paperboards (details below). Recent government actions reflect a pretty supportive policy-environment for the legal cigarettes industry. The government has also recently effected an amendment to the GST Compensation Cess schedule, which we believe is a move to help cast the tax net wider on non-cigarettes forms of tobacco (specifically gutkha, pan masala, chewing tobacco etc). We expect the stock to continue to do well; the lower-hanging fruits are now mostly in the bag, though.

Inline quarter overall with stronger delivery in FMCG offset by a more muted Paperboards performance: ITC reported 6.1%, 18.9%, 20.1% growth in sales, EBITDA and adjusted net profit to INR 172.2bn, INR 62.1bn and INR 50.3bn. Operating performance was overall on expected lines but with a better mix – stronger-than-expected delivery in FMCG on both topline and profitability was offset by a weaker Paperboards (planned shutdown of pulp mills for capacity expansion, softening pulp prices, muted demand in global markets). Hotels continued to turn in a good show. Cigarettes business remained strong with volumes estimated to have grown by c.12% (in-line with our expectations) aided by innovations and focused efforts to drive premiumisation across segments, and importantly, continued volume claw-back from illicit trade on the back of deterrent actions by enforcement agencies and relative stability in taxes. Reported cigarette margin (as a % of turnover including excise) was down a tad due mainly to the hike in excise effected in the Union Budget in Feb. FMCG growth of 19.4% is at the higher-end of the range seen across peers during the quarter with significant expansion in margin.

Non-cigarette EBIT grew >60% helped by significant uptick in FMCG, Hotels and also Agri profitability: 1) Cigarettes EBIT grew 14%, largely volume-driven (12% volume growth, as per workings). Reported margin was down a tad due to the excise hike effected in Feb. Given the strong momentum in volumes, the business has been able to deal with the excise-hike without much of a pricing intervention so far. 2) FMCG EBIT more than doubled with EBIT margin up 445bps to an all-time high of 10.1%; ex of bunched-up PLI incentives, we estimate intrinsic margin to have been in the c.8.5% range (vs our forecast of 7.6%). Continued pressure on input-costs basket was offset by multipronged interventions viz. premiumisation, supply-chain agility and other cost-efficiencies measures, judicious pricing, etc. 3) Hotels revenue was 2x LY level with EBITDA margin at 34.8% driven by higher RevPAR, operating leverage and benefits from structural costs interventions undertaken. EBIT margin of 25.5% is the highest in last ten years. 4) Agri profits were helped by a richer mix with strong growth in value-added products and leaftobacco exports. Topline was impacted by the restrictions imposed on wheat & rice exports. 5) Paperboards grew just 1.8% which is a steep deceleration vs recent quarters. Scale deleverage led to a 1% decline in EBIT with margin down 56bps

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