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A steady defensive bet

One of the largest players in consumer: ITC is one of the largest cigarette manufacturers and the second-largest FMCG player by market capitalization. It has a diversified business presence across FMCG (cigarettes & other products), hotels, paperboards and packaging and agri-business.

Cigarettes remain the core while other segments are on a path of revival: After a challenging FY21, ITC witnessed a strong volume revival across all its segments such as cigarettes, hotels, Agri & FMCG as well as paperboards in FY22. The growth was largely driven by easing restrictions, improvement in demand, focus on innovation and premiumization of products. However, amongst the segments, cigarettes still contribute the highest and are a core earning segment with a share of ~40.5% and

Continuous scaling of FMCG segment: ITC has been diversifying from cigarettes to FMCG and now its contribution to revenue has increased to 25.5% in FY22 from 11.3% in FY08. The next leg of growth will be led by a focus on product mix & premiumization, go-to-market strategy, increasing focus on direct-to-consumer platform and investment in brands by acquiring the stake.

Consistently rewarding shareholders: ITC is one of the private sector companies which have been consistently rewarding shareholders by paying dividends. In the last 5 years, the company has paid an average of 83% as dividend payout. Going ahead as well, the company announced that it is expected to maintain its dividend payout ratio on similar lines i.e. ~80-85%.

Cash-rich with zero debt:

ITC has a strong balance sheet as it is debt-free and generates a healthy free cash flow of more than Rs 13,000 cr as of FY22 which is positive.

Valuation: We have estimated its revenue/EBITDA/PAT to grow at 10%/11.9%/12.2% CAGR over FY22-24E. We believe continuous growth in cigarettes along with a revival in all other segments largely FMCG and Agri will drive growth for the company. In addition, high dividend payout, debt-free status and strong free cash flow generation as compared to its peers make it one of the preferred picks in the sector. We have initiated coverage on ITC with a Buy rating and a target price of Rs 332.

Key Risk: 1) Increase in taxes on cigarettes. 2) High Inflation in raw material prices.

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