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In-line results; outlook remains hazy

* ITC’s 3QFY21 results were broadly in-line, with cigarette volumes declining ~7% YoY. Unlike other discretionary categories, no sharp sequential improvement is seen in Cigarettes. There was no respite on Cigarette EBIT either, with 8.1% YoY decline posted for 3Q – implying that Cigarette EBIT growth has been below 10% for 24 of the past 26 quarters now.

* Growth in the FMCG-Others business has also tapered to the single digits on a reported basis as in-home consumption is no longer growing at the same pace. A sequential dip was reported in FMCG-Others margins, likely due to the resumption of ad spend after a lull in the preceding quarters.

* As highlighted in our detailed note in December, with the Cigarette business likely to contribute ~82% to EBIT even in FY23 (from 85% in FY20), there is no material reduction in dependence on this segment – which is beset by concerns ranging from a) weak EBIT growth for several years now, b) the overhang of a possible GST increase going ahead, and c) ESG-related issues over tobacco, leading to a reduction in valuation multiples. With PBT growth over FY20–23E (7.9% CAGR) likely to remain similar vis-à-vis the weak growth of the preceding five years (6.6% CAGR), valuations of 17.3x FY22E and 15.3x FY23E, although cheap, are fair considering the stated concerns. Maintain Neutral.

Results broadly in-line

* ITC’s 3QFY21 net revenue was flat YoY at INR117.9b (est. INR113b). EBITDA declined 7.2% YoY to INR42.8b (in-line), PBT declined 6.2% YoY to INR48.5b (est. INR46.3b), and adj. PAT declined 14.3% YoY to INR36.6b (est. INR34.5b).

* Overall gross/EBITDA margins contracted 400bp/210bp YoY to 57.5%/36.3% in 3QFY21.

* Cigarette volumes are likely to have declined ~7% (in-line), although higher realizations led to growth of 3.5% YoY in cigarette net sales to INR55b. EBIT in Cigarettes declined 8.1% YoY to INR34.5b (est. 7.5% decline YoY to INR34.7b). Thus, the net EBIT margin for the Cigarettes biz contracted 790bp YoY to 62.8%.

* FMCG-Others net sales grew 7.5% YoY to INR35.6b in 3QFY21 (up ~11% YoY on a comparable basis, excluding the Lifestyle Retailing business and Education and Stationery Products business). EBIT in FMCG-Others surged 92.7% YoY to INR2.1b (v/s INR1.1b in 3QFY20).

* The Agri biz’s revenue grew 18.5% YoY, while that of Paperboards, Paper, and Packaging declined 5% YoY. Revenue for Hotels plunged 57.4% YoY.

* 9MFY21 sales/EBITDA/PAT declined 8.9%/20%/19.5% YoY.

* ITC declared an interim dividend of INR5 per share.

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