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ITC Ltd. (ITC) 2QFY24 revenues were in-line but margins came in lower than our estimate. Within business segments, while cigarette business was in-line, FMCGOthers, Agri business and Paperboards, Paper & Packaging (PPP) missed our estimate. The underperformance in these segments was offset by lower excise duty and inter-segmental sales versus our expectation for the quarter. PPP also sharply disappointed on margins largely led by subdued demand, sharp reduction in global pulp prices and high base effect. As export ban comes into base, normalized Agri business growth should lead to better overall revenue growth in 2HFY24 for ITC. We now introduce FY26 estimates and but build a relatively subdued 10% EPS CAGR led by 7.2% revenue CAGR over FY23-FY26E. Rolling forward to Sept’25, we get a revised target price (TP) of Rs500, maintaining our ADD rating

Result Highlights

* 2QFY24 headline performance: Standalone revenue (adjusted for excise duty) was up 2.6% YoY to Rs165.5bn (vs est. Rs164.3bn). EBITDA was up 3% YoY to Rs60.4bn (vs est. Rs63.3bn). Adjusted PAT (APAT) was up 10.3% YoY to Rs49.3bn (vs est. Rs49.5bn).

* Cigarette revenue grew by 10.1% YoY to Rs76.6bn (in-line with our est.), up ~9.5% on a 4-year CAGR basis. Net Segment Revenue (Net of Excise Duty/NCCD on Sales) up by 8.5%. We believe cigarette volumes (calculated) to have grown by around ~6% (vs our est. of 7%). Cig. business EBIT grew by 8% YoY with EBIT margins down by 130bps YoY to 62.4% (flat QoQ).

* FMCG-Others revenue grew by 8.3% YoY to Rs52.9bn (below our est.), up ~12.6% on a 4-year CAGR basis. FMCG-Others EBIT margins was up 170bps YoY to 8.3% (flat QoQ). Segment EBITDA margin stood at 11% (+150bps  Paperboards, Paper & Packaging (PPP) again had a disappointing quarter (revenues declined 9.5%; EBIT margin down sharply by 1,230bps YoY to 15.3%) led by subdued demand conditions, low priced Chinese supplies in global markets, drop in Chinese domestic demand, slump in EU markets exerting pressure on exports, sharp reduction in global pulp prices and high base effect.

* Agri business was down just 1.7% YoY to Rs39.3bn (below our est.). Segment EBIT margin up 40bps YoY to 9.1%.

* Hotels business saw a growth of 21.2% YoY to Rs6.5bn (above our est.). Segment EBIT margin stood at 19.4% (+370bps YoY).

* Overall Gross margin came in below our estimate at 57.3% (+30bps YoY but down 220bps QoQ). EBITDA margin was up just 10bps YoY at 36.5% (vs our est. 38.5%).

View & Valuation

There is minor downward revision in our FY24E/FY25E EPS. What worked well for ITC in FY22/FY23: (1) Stable taxation regime and share gains from illicit trade supported cigarette business. (2) FMCG-Others business growing at healthy rate and now also showing signs of better profitability led by structural investments of the past along with scale, innovations, growing reach, moderating inflation, etc. (3) Strong overall performance in the Hotels business post Covid recovery. Some of these factors are now normalizing and additionally, PPP business is now facing near term pressure from multiple issues. On the other hand, Agri business will see strong growth going forward as export ban comes into base from 3Q. Return ratios have improved in FY23 and are expected to improve further led by hotel business demerger and no major capex in near term. We now introduce FY26 estimates and but build a relatively subdued 10% EPS CAGR led by 7.2% revenue CAGR over FY23-FY26E. Rolling forward to Sept’25, we now get a TP of Rs500 (Rs495 earlier), maintaining our ADD rating.

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