Stock of the day: Buy ITC Ltd For Target Rs. 485- Motilal Oswal Financial Services
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Strong momentum continues; healthy volume growth
* ITC reported healthy cigarette volume growth of ~12% v/s expectation of 13%. The 3-year/4-year average volume growth stood at 9.3%/4.3%, indicating strong demand momentum. With no material increase in cigarette GST/national calamities duty in the recent budget, the volume growth outlook remains healthy.
* Unlike its staples peers, ITC has reported consistent impressive performance in its Other FMCG business (~19% revenue growth and margin improvement despite elevated RM costs), along with robust performance in Hotels. ITC’s earnings visibility remains better than peers’. Maintain BUY.
In-line operating performance; Cigarette EBIT up 14%
* ITC’s 4QFY23 net revenue grew 5.6% YoY to INR164.0b (est. INR160.5b), EBITDA grew 18.9% YoY to INR62.1b (est. INR62.1b), PBT rose 19.8% YoY to INR65.2b (est. INR64.2b), and adj. PAT grew 19.6% YoY to INR50.1b (est. INR47.3b).
* Gross margin expanded ~550bp YoY to 58.6% (est. 57.8%), while EBITDA margin expanded ~430bp YoY to 37.9% (est. 38.7%).
* Cigarette volume is likely to have increased ~12% YoY in 4QFY23 (est. +13%). Net Cigarette sales grew 12.6% YoY to INR62.5b (est. INR63.0b). Net Cigarette EBIT margin expanded 90bp YoY to 75.1%.
* FMCG-Others sales grew 19.4% YoY to INR49.4b. EBIT more than doubled YoY to INR5b in 4QFY23.
* Agri business sales declined 18% YoY to INR35.8b.
* Paperboards sales were flat YoY at INR22.2b. ? Hotels business sales doubled YoY to INR7.8b.
* FY23 net sales/EBITDA/adj. PAT grew 17.2%/26.3%/24.1% YoY to INR660.4b/ INR239.4/INR186.8.
Valuation and view
* There are no material changes to our estimates.
* ITC posted a healthy ~24% EPS growth in FY23 and we expect an EPS CAGR of ~15% over the next two years. ITC’s earnings outlook is better compared to other large-cap staples players in FY24 and FY25.
* At a time when uncertainty looms over the industry due to high inflation, unpredictable monsoons and continued weak rural sales, ITC’s earnings performance in the last couple of years has shined like a beacon.
* The stock has done exceptionally well since our detailed upgrade note in Jun’22 with ~60% appreciation, while consumer peers, both staples and recently, discretionaries have struggled. ITC’s dividend yield is healthy at 3.5- 4% despite the stock price appreciation.
* The key challenges for ITC – an extremely punitive tax regime of the past, Covid-related disruption and commodity cost inflation – now seem to be receding. We maintain BUY rating with a TP of INR485
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