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Revenue was a mixed bag: ITC posted mixed gross revenue growth for Q4FY23 wherein QoQ remained flat as its largest earning segment; cigarettes revenue saw flattish growth while improvement was seen in FMCG, Hotels and FMCG business. However, as compared to last year gross revenue improved by 7.3% YoY to Rs 19,058cr led by improvement in demand and sales for its FMCG products, hotels and Cigarettes while agri and paperboards business was muted. For FY23, gross revenue reported at Rs 76,518cr, higher by 17.3% YoY led by growth across all segments.

Margin saw strong improvement YoY: ITC saw healthy growth on profit and margin front as compared to last year. Its gross profit grew by 16.8% YoY and 0.5% QoQ while gross margins improved by 544bps YoY and 55bps QoQ because of easing raw material cost and focus on premiumization. In addition, better topline performance and operating efficiency too aided its EBITDA and PAT (after exceptional & share in profits) which grew by 18.3% YoY and 22.9% YoY to Rs 6,624cr and 5,2543cr, respectively which also helped improvement of its margins by 374bps and 396bps YoY.

Mixed growth in Cigarettes segment: The company’s cigarettes business saw mixed sentiments as it saw growth of 12.6% YoY while flat growth sequentially. Its EBIT grew by 12.8% YoY and 1.1% QoQ led by stability in taxes, premiumization of products and continuous innovation. Further, it contributed ~39.4% of total revenue and ~75% of profits in Q4FY23 so any slowdown can impact ITC’s growth

Stellar performance by Hotel segment: The company’s hotel business has seen stellar performance for Q4FY23 as well as for FY23 driven by increasing demand for leisure and business travel as well as weddings. Its revenue grew by 98% YoY and 9.4% QoQ to Rs 809cr and increase in contribution to 3.9% in Q4FY23 from 2.2% in Q4FY22. On the profit front, it posted growth of 37.3% QoQ to Rs 205cr and increased its contribution to profits to 3% in Q4FY23 while the segment was in losses of Rs 29cr in Q4FY22.

Outlook & Valuation: ITC has been improving its growth and scaling up businesses while its strong focus remains on innovation, improving supply chain and strengthening digital presence. Additionally, maintaining cost, adding value added product portfolio and easing in raw material prices would aid margins to improve. Financially the company’s revenue/PAT is expected to grow at 15%/17% CAGR over FY23- 25E. However, on the valuation front the stock is currently trading at an elevated level of 26.8x P/E and also we have seen strong run up in the stock price in the past one year so we believe there is limited scope of upside. Hence, we are revising our rating to Neutral from Buy with a target price of Rs 451, an upside of 7.5%.

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