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Cigarette volumes closer to pre-Covid levels…

About the stock: ITC is biggest cigarettes & second largest FMCG company in India with ~78% of market share in cigarettes & presence in staples, biscuits, noodles, snacks, chocolate, dairy products & personal care products.

* The company is also present in Paperboard, printing & packaging business with the revenues of | 4549 crore, agri business with | 8001 crore

* The company has more than 200 manufacturing facilities in India. It has a distribution reach of over 6 million retail outlets across various trade channels & strong 25 brands across various categories

Q2FY22 Results: ITC reported strong sales recovery with cigarettes volume growth of 10% & robust 25.4% growth in paperboard business.

* Sales were up 12% YoY, cigarettes sales recovering with 10.2% growth

* EBITDA was at | 4615 crore, up 12.9% YoY, with margins at 34.1%

* Consequent PAT was at | 3697.2 crore (up 13.7% YoY)

What should investors do? ITC’s share price has given near zero return in last five years (from | 242 in October 2016 to 238 in October 2021)

* We maintain our estimates with swift recovery in cigarettes, paperboard & hotels business

* We continue to maintain our HOLD rating on the stock

Target Price and Valuation: We value the stock at | 260 on SOTP basis valuing cigarettes business 12x FY24 earnings & FMCG business 5x FY24 sales

Key triggers for future price performance:

* FMCG business growing at a sustained pace with continuous improvement in margins. Opportunity size of foods portfolio is large

* Duties & taxes on cigarettes to remain stable given increasing prevalence of illicit & contraband cigarettes

* Strong growth expected in paperboard business with healthy demand from user industry after Covid-19 recoveryb

Alternate Stock Idea: We like Zydus Wellness in our FMCG coverage

* It is growing at a steady pace in nascent categories with strong presence in health, nutrition space & margin expansion possibilities Trading at significant discount to FMCG peers. BUY with TP of | 2,800

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