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In line result; outlook remains uncertain

* While a better than expected performance in the Agri business led to a beat on sales, EBITDA and PBT were in line with our estimates. Volume and sales growth in Cigarettes, sales growth in FMCG – Others, as well as a full year dividend payout were broadly in line with our expectations.

* Unlike other discretionary categories, which have reported a strong rebound, two-year average growth in Cigarette volumes as well as EBIT declined by ~2% each in 4QFY21.

* While the impact of lockdowns in 1QFY22 may not be as severe as that in 1QFY21, there will be a further sequential impact compared to 4QFY21. Uncertainly on Cigarette EBIT growth, which has been below 10% for 25 of the last 27 quarters, persists. Maintain Neutral.

Sharp sales growth in the Agri business leads to sales beat

* Net revenue was up 22.6% YoY to INR132.9b (est. INR119.1b), EBITDA rose 7.4% to INR44.7b (in line), PBT grew 7.6% to INR48.5b (est. INR46.9b), and adjusted PAT declined 1.3% YoY to INR37.5b (est. INR34.4b) in 4QFY21 on account of a higher tax rate YoY.

* Overall gross/EBITDA margin contracted 820bp/480bp YoY to 54.3%/33.6% in 4QFY21.

* Cigarette volumes are likely to have grown ~7% (in line), although higher realizations led to 14.2% YoY growth in net sales to INR58.6b. EBIT in Cigarettes grew 7.7% YoY to INR36.7b (est. 13% growth YoY to INR38.5b). Net EBIT margin for the Cigarettes business contracted 380bp YoY to 62.6%.

* Net sales for FMCG – Others grew 15.8% YoY to INR36.9b in 4QFY21. EBIT in FMCG – Others grew 28.4% YoY to INR1.9b (v/s INR1.5b in 4QFY20).

* Revenue in the Agri business surged 78.5% YoY, while that of Paperboards, Paper, and Packaging grew 13.5%. Revenue for Hotels plunged 38.2% YoY.

* Net sales remained flat at INR454.9b in FY21. EBITDA/PAT declined 13.4%/14.6% YoY to INR155.2b/INR130.3b.

* ITC declared a final dividend of INR5.75 per share. Total dividend for the year was INR10.75 per share.

Valuation and view

* Changes to our model on account of the ongoing lockdowns caused by the second COVID wave in India has resulted in a 5.9%/3% reduction in our FY22E/FY23E EPS estimate. Further extensions of the lockdowns could also have an adverse effect on forecasts.

* As highlighted in our detailed note in Dec’20, with the Cigarette business likely to contribute over 82% to ITC’s overall EBIT, even in FY23E (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) overhang of a possible GST increase going forward, and c) ESG-related issues over tobacco, leading to a reduction in valuation multiples.

* With PBT growth over FY20-23E (7.4% CAGR) likely to remain similar vis-à-vis weaker growth in the preceding five years (6.6% CAGR), valuations of 17.5x/15x FY22E/FY23E, although cheap, are fair considering the stated concerns. Dividend yield of 5-6% is expected over the next two years, in line with global Cigarette players. We continue to value ITC at a 20% premium to its global peers. Targeting 15x Jun’23E EPS, we arrive at our TP of INR220 per share. Maintain Neutral.

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