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Cigarettes volume growth continues

* ITC reported healthy cigarette volume growth of ~8% in 1QFY24 vs. our estimate of 5%. The 3-year/4-year average volume CAGRs stood at 21.7%/7.0%, indicating strong demand momentum. With no material increase in Cigarette GST/National Calamities Duty, the volume growth outlook remains healthy.

* Unlike its staple peers, ITC has consistently posted impressive performance in the Other FMCG business (16% revenue growth and margin improvement despite elevated RM costs compared to pre-pandemic levels).

* The Agri business faced setbacks due to export restrictions, while the Paper segment was affected by demand issues, competition from China, lower pulp prices, and higher input costs. However, the Hotels segment reported a robust performance. We maintain BUY on ITC as we believe its earnings visibility remains better than peers’.

Sales disappoint; Cigarette EBIT up 11.2%

* Net revenue declined 8.5% YoY to INR158.3b (est. INR181.4b), EBITDA grew 10.7% YoY to INR62.5b (est. INR68.1b), PBT rose 18.2% YoY to INR65.5b (est. INR68.9b), and adj. PAT grew 17.6% YoY to INR49.0b (est. INR51.8b).

* Gross margin expanded ~850bp YoY to 59.5% (est. 58.1%), while EBITDA margin expanded ~680bp YoY to 39.5% (est. 37.2%).

* Cigarette volumes are likely to have increased ~8% YoY in 1QFY24 (est. +5%). Net cigarette sales grew 12.6% YoY to INR63.0b (est. INR57.1b). Net cigarette EBIT margin contracted 120bp YoY to 73.9%. ? FMCG-Others sales grew 16.1% YoY to INR51.7b. EBIT more than doubled YoY to INR4.3b in 1QFY24.

* Hotels business sales grew 8.1% YoY to INR6.0b. The segmental EBIT grew 17% YoY to INR1.3b, while EBIT margin expanded by 170bp YoY to 21.9%.

* Agri business sales declined 23.7% YoY to INR57.0b. The segment recorded 25.3% YoY growth in EBIT to INR3.6b, while EBIT margin expanded by 240bp YoY to 6.2%.

* Paperboards sales declined 6.5 YoY at INR21.2b. EBIT declined 22.9% YoY to 4.7b, while EBIT margin contracted 480bp YoY to 22.3%.

Valuation and view

* Changes to our model have resulted in a 2.4%/2.5% decrease in our FY24/FY25 EPS estimates due to persistent challenges in the Agri and Paper businesses. With the Cigarettes business likely to contribute ~80% to ITC's overall EBIT, there was no significant decline in earnings.

* ITC demonstrated healthy ~23.5% EPS growth in FY23 and we expect an EPS CAGR of ~14% over the next two years as well. ITC’s earnings outlook is better than other large-cap staples players in FY25 and in terms of a twoyear CAGR ending FY24.

* At a time when uncertainty looms over the industry, led by high inflation, unpredictable monsoons and continued weak rural sales, ITC’s recovery in Cigarette volumes offer decent earnings visibility at reasonable valuations and attractive dividend yield. We maintain our BUY rating with a TP of INR535, based on 28x FY25E EPS.

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