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When it rains, it pours

ITC’s 2QFY23 report is as good as it gets – in a positive way. For yet another quarter, momentum in all the business segments moved in the same (right) direction. Strong volume growth of >20% in the cigarettes business was helped not only by increased socialising occasions post the pandemic but importantly, also by volume recovery from the illicit trade on the back of a stable taxation environment; of course, product innovations, enhanced accessibility and a strong execution machinery also played their roles. FMCG grew 21% - likely the highest growth amongst peers once again – with just a very small hit on margin despite the huge surge in commodity costs seen across the board. Hotels, Agri and especially Paperboards successfully leveraged the cyclical tailwinds in their respective sectors. Noncigarette EBIT grew 48% - 2x the rate of growth in Cigarette EBIT which itself was quite strong. The stock has gained strong momentum in recent months (+60% YTD) but still offers a 3.7% dividend yield at CMP. We expect Sep-Q earnings to help support ITC’s re-rating.

* Firing on all cylinders again: ITC reported 27.1%, 27.1% and 20.8% growth in sales, EBITDA and net profit to INR 169.7bn, INR 58.6bn and INR 44.7bn. Topline, bottomline were c.6% better than our estimates led by strong beat across all business segments barring Hotels which had a sequential drop in revenue. Cigarette volumes grew >20% yoy and the business doesn’t seem to feel the absence of its pricing-lever one bit for now. We reckon that the business is now in a reasonably good position to hike prices when required but we are also quite agreeable with the strategy to gather a larger volume-base whenever such opportunities exist. More importantly, there continued to be decisive gains from the illicit trade, helped by a stable tax regime and deterrent actions by enforcement agencies to curb illegal cigarettes. This is clearly a win-win for both the government and the business, thereby strengthening the argument in favour of a continuation of a more balanced approach to tobacco taxation. FMCG growth of 21% yoy was led by both Staples as well as Discretionary categories. Stationery continued its strong comeback. Hygiene is likely the only exception given a very strong base during the pandemic.

* Cigarette margin expansion was relatively lower this time round; Paperboards contributed smartly to profitability:Cigarette margin expansion was relatively lower this time round, with mix playing a smaller role (1-2%, as per our workings) vs that seen during Jun-Q (c.4ppt contribution from mix). This is more a function of how badly urban centres were hit in the base period; pace of innovations, new launches and premiumisation continued to be strong. FMCG EBIT grew 18% yoy with margin down by just 17bps yoy (6.6% vs 6.7% LY) as input-costs inflation was managed through multi-pronged interventions including premiumisation, supply chain and other savings, judicious pricing, etc. Agri revenue and EBIT grew 44% and 16.6% yoy helped by both commodities and leaf tobacco exports. Paperboards revenue grew 25% yoy helped by strong demand across end-user segments as well as exports while EBIT was 54% higher yoy with highest-ever EBIT margin of 27.5% aided by better realisations, operating-efficiencies, and importsubstitution measures that helped offset the steep inflation that otherwise exists in the input-costs basket. Hotels revenue grew 82% yoy with both ARR and Occupancy above pre-pandemic levels. Revenue was, however, 3.4% lower qoq and impact of the same was felt on profitability with EBITDA margin lower by 330bps vs 1Q.

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