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Cigarettes volume improved

ITC (ITC IN) delivered slightly better cigarettes volumes though lower on profitability. EBIT growth in Cigarettes and FMCG took a hit due to higher input cost, which was partly offset by agri businesses. No tax hikes were announced for cigarettes in the recently-concluded Union Budget, which is a positive for volumes. We retain our positive view as ITC continues to deliver steady growth amid subdued demand. We reiterate Accumulate with SoTP-based TP pared to INR 487.

Cigarette growth slightly better; FMCG growth moderates further:

ITC reported net sales of INR 170.5bn in Q3, up 8.6% YoY, largely as estimated. Cigarettes sales (net of tax) grew 8.1% YoY, as estimated, as cigarette volume rose ~6%. Growth was led by differentiated variants and the premium segment. ITC also restructured its trade marketing spend in the Cigarettes business for sharper last-mile execution. FMCG sales rose 4% YoY to INR 54.2bn, led by staples, snacks, frozen snacks, dairy, premium personal wash, homecare and agarbatti (incense sticks). Strong performance continued in the premium portfolio and alternate channels. Competitive intensity was high in noodles, snacks, biscuits and popular soaps. Notebooks were impacted by a high base and opportunistic play by local brands (thus, paring paper prices sharply). Excluding this, the notebooks segment grew 5.2% YoY. The salience of digital and modern trade in the FMCG segment for 9MFY25 grew to 31% from 17% in FY20.

Agri posts stable growth; paperboards continue to drag:

Revenue from the Agri business grew 9.7% YoY, on: 1) strong growth in value-added agri exports of spices and coffee and 2) robust growth in leaf tobacco exports, led by new business development and agile execution. Stock limits and export restrictions on wheat continue to limit business opportunities for ITC. Paperboards, Paper and Packaging revenue grew 3.1%, hit by low-priced supply from China, weak domestic demand and lower realizations.

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Source: Bloomberg

Cigarettes and FMCG margin contracted due to inflation in input cost:

Q2 EBIT margin shrank 230bps YoY to 32.1%, 100bps lower than our estimates. EBIT for cigarettes at INR 49.2bn grew by 4.1% YoY, 1% below our estimates, as margin contracted 210bps YoY, impacted by sharp escalation in leaf tobacco prices. FMCG EBITDA margin was down 250bps YoY at 8.5%, as steep inflation was witnessed in prices of edible oil, wheat, maida, potato, cocoa and packaging inputs, though partially offset by cost management initiatives, calibrated pricing actions and premiumization.

Reiterate Accumulate; TP pared to INR 487:

We cut our earnings estimates by ~8% each for FY26E and FY27E, to factor in lower revenue largely pertaining to the demerger of the hotels business and lower operating margin. So, we pare our SoTP-TP to INR 487, from INR 553, valuing the cigarettes business at 25x FY27E P/E and the FMCG business at 5x FY27E price/sales. We reiterate Accumulate. The key risk is lower-thanestimated volume growth in the cigarettes business.

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