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Strategy refresh to build investor confidence

In its first-ever analyst interaction, ITC showcased its strategy refresh focusing on ITCNext growth drivers for various business verticals. We believe such interactions are a step towards transparency and will enhance investor confidence. We note that its growth strategy has a lot of substance and will enable ITC to become a future-ready organization by banking on advanced technology and enhanced digital capability, driving growth as well as cost competencies. Focus on agility and consumer-centric innovations using disruptive technology will improve speed to market and deliver superior profitability. Further, improved disclosures on ESG and sustainability agenda (pointed by us in our previous report) should now warm up investors, who have otherwise remained fence sitters. We firmly believe that ITC is far below its fair value and will significantly outperform its peers. We expect operating scale to lift foods revenue and profitability in the near term, though the overhang on cigarette taxation could pose concerns. We maintain BUY, with a DCFbased target price of Rs345 (22.5x FY24E EPS).

Strategy refresh reemphasizes growth levers are intact

ITC’s strategy refresh focuses on multiple growth drivers for various business verticals to capture market opportunities. Its attempt to build future-fit brands using agile and purposeful innovation should help in winning new age consumers, as its digital focus aids structural interventions in building new platforms to connect end consumers. Further, its efforts on cost optimization using advanced technology in smart buying and network optimization extracting cost efficiencies should ensure improvement in profitability.

Visible growth drivers across business segments

We have argued in our Lionheart report earlierthat the foodssegment (forms ~81% of revenues) is driving other-FMCG business, suggesting four growth drivers: (1) optimizing brand spends, (2) improving product mix, (3) increasing realizations, and (4) operating leverage, as the company is entering into new white spaces. These have started propelling FMCG segment margins. Notably, with scale and network optimization, we expect double-digit EBITDA margin soon. Despite lower consumption of cigarettes (8%), stable taxation policy could check illicit products, as the company plans to maximize cigarette potential within the tobacco consumption basket.

Focus on ESG and sustainability should lift investors’ confidence

The ESG buzzword had created a perception that all sin good companies are in the ESG negative list for FIIs. However, as the dust is settling and the meaning of ESG is becoming clearer, investors are acknowledging ITC’s achievements on the ESG front and revisiting earlier perceptions. ITC has been Carbon/Water/Solid Waste Recycling positive for 16/19/14 years in a row and is rated AA by MSCI-ESG (highest among global tobacco companies) and is included in the Dow Jones Sustainability Emerging Market Index.

Inexpensive valuations leave enough runway for stock re-rating

Strategy refresh, stable taxation for cigarette business, tailwinds for FMCG business, use of data analytics, widening distribution, and cost optimization via supply chain interventions and smart manufacturing are key positives. Company has ruled out any potential for demerger except hotels and share buy-back. Reasonable valuations make the stock more attractive. We maintain our BUY rating, with a DCF-based TP of Rs345 (22.5x FY24E EPS). Key risks: sharp increase in taxation, higher leaf tobacco prices, and delayed economic recovery.

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