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EBITDA in line; Cigarette volumes higher than expected

* Revenue was higher than our expectations, led by outperformance in the Agri and Hotels businesses, but overall EBITDA and PAT was in line.

* Among the internals, the positive surprise was the Cigarette volume growth of ~13%. We were expecting some disruption towards the end of 3QFY22 on account of the COVID-led restrictions beginning from the last fortnight of Dec’21. It is true that this growth was on a 7% volume decline. Nevertheless, average Cigarette volume and EBIT growth over the last two-years remains between 2% and 3%. With input costs led pressures weighing on FMCG – Others’ margin YoY, EBIT diversification away from Cigarettes will take time. We maintain our Neutral view.

Sales beat on Hotel and Agri business outperformance; margin disappoints

Revenue grew 32.5% YoY to INR158.6b (est. INR132.7b) in 3QFY22. EBITDA/PBT/adjusted PAT grew 18.2%/12.5%/12.7% YoY to INR51b/ INR54.9b/INR41.6b (in line).

 Gross margin contracted by 580bp YoY to 51.3% (est. 59%), while EBITDA margin contracted by 390bp YoY to 32.2% (est. 37.9%) in 3QFY22.

Cigarette volumes likely to have grown by 12.5% YoY (est. +6%).

The volume decline in the base quarter was 7%. Sales grew 12.6% YoY to INR53b (est. INR51.1b). EBIT grew 14.4% YoY to INR39.5b (est. INR38.3b). EBIT CAGR in the last two years was 2.6%. EBIT margin expanded by 120bp YoY to 74.5%.

FMCG – Others sales grew 9.3% YoY to INR40.9b in 3QFY22.

EBIT growth was flat (+1.1%) YoY at INR2.4b.

Agri business/Hotels sales doubled YoY to INR49.6b/INR4.7b. Paperboards grew 38.5% YoY to INR20.5b.

Other income fell 16.7% YoY to INR8.1b.

 Sales/EBITDA/adjusted PAT rose 26.8%/24.1%/17.1% YoY in 9MFY22.

 The board has declared an interim dividend of INR5.25/share.

Valuation and view

* While its 3Q earnings were in line with our estimates, the likely impact of the Omicron COVID variant on its 4Q earnings has resulted in ~6% reduction in its FY22E EPS. There has been no material change in our FY23E and FY24E EPS.

* As stated in our detailed note in Nov’21, with the Cigarettes business likely to contribute ~80% to ITC's overall EBIT even in FY23E, there is no material reduction in its dependence on this segment, which is beset by concerns of: a) weak EBIT growth for several years now, b) the overhang of a possible GST increase going forward, and c) ESG-related issues over tobacco, leading to a reduction in global valuation multiples.

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