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Steady results despite supply chain disruptions

ITC limited is a diversified conglomerate with presence in FMCG, Hotels, Paperboards & Specialty Papers, Packaging, and Agri-business. The company directly employs over 36,500 people across businesses.

* Standalone revenue rose 36.6% YoY (-8.1% QoQ) on the back of growth across verticals, partially hindered by lockdowns in Q1FY22.

* EBITDA surged 50.8% YoY, as EBITDA margin expanded 300bps YoY to 31.0% owing to better product mix and cost management. PAT also rose 28.6% YoY, partly offset by lower other income and higher taxes.

* COVID second wave played a spoilsport during Q1FY22 limiting growth. However, we expect performance to improve going forward on the back of demand growth. We hereby reiterate our BUY rating on the stock with a revised target price of Rs. 263 based on SOTP valuation.

Pandemic disruptions impact growth sequentially

In Q1FY22, topline increased 36.6% YoY to Rs. 12,884cr (-8.1% QoQ), indicating a rebound in demand, only partially offset by the supply side disruptions caused by lockdowns during the quarter. ITC recorded significant growth vis-à-vis prior year levels and is expected to get back on track by the next quarter as activity picks up. FMCG business reported 22.4% YoY growth in sales, with Cigarettes sales rising 32.9% YoY to Rs. 5,122cr owing to surge in demand. Non-Cigarettes business also grew 10.4% YoY to Rs. 3,726cr. Paperboards, Paper & Packaging (PPP) segment sales went up 54.2% YoY to Rs. 1,583cr on higher demand as economic activity stirred to a start. Hotels business recorded ~5x growth in sales to Rs. 127cr, however the lockdown impact was observed as the sales de-grew 55.8% on QoQ basis.

EBITDA margin expands on YoY basis

EBITDA grew 50.8% YoY to Rs. 3,992cr (-10.8% QoQ), aided by growth in volumes and demand, coupled with a better product mix and efficient cost management. EBITDA margin improved 300bps YoY to 31.0%, although were down 90bps QoQ owing to supply side constraints. Cigarettes segment EBIT grew 37% YoY, with FMCG-Others reporting EBIT growth of 38% YoY. Moreover, PPP segment EBIT rose 145% YoY driven by premium product mix and higher realisations. PAT grew 28.6% YoY to Rs. 3,013cr (-19.6% QoQ), partially offset by lower other income (-52.2% YoY) due to lower market yields and higher taxes (+27.5% YoY).

Core business to drive growth as demand rebounds

Cigarettes business continues to significantly dominate ITC’s overall sales. Despite a slowdown witnessed during the quarter owing to lockdown, both consumer demand and volumes are on a steady rise as economic activities pick up pace. Moreover, the non-cigarettes FMCG business is also doing quite well, aided by an increasing focus on ecommerce and modern trade channels like ITC s-Store and online aggregators like Swiggy, Zomato, etc. Company’s agri business and other verticals are also on track to see gradual improvements from current levels.

Valuation

Barring a third COVID wave, ITC’s woes look to be gradually disappearing as its various businesses rebound to near pre-COVID levels. Despite the disruptions experienced during the quarter, the company made strong recovery in both sales and margins over the last few quarters. We expect further improvements in performance on steady demand recovery and therefore reiterate our BUY rating on the stock with a revised target price of Rs. 263 based on SOTP valuation.

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