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ITC Ltd. (ITC) 1QFY25 operating performance was a mixed bag with beat on topline but margins missing our estimates for the quarter. Topline growth of 7.4% was supported by strong 22.2% growth in Agri-business driven by value added agri products, leaf tobacco and wheat. Progressive scale-up of export shipments of Nicotine & Nicotine derivative products post trials should provide some further aid for the segment. Paperboards, Paper and Packaging (PPP) came lower than our estimate but green shoots of recovery in domestic demand are visible ahead of the festive season. Cigarette and FMCG-Others business saw minor deviation growing at 6.1% (we believe with a ~2% volume growth) and 6.3% YoY, respectively. Stability in taxes and recovery in rural markets should support growth while it continues to face pressure on margins in the very near-term from commodities in key business segments. Based on target multiple of ~26x (3yr/5yr avg fwd. multiple ~22x/20x) on Sep’26E EPS, we arrive at a revised target price (TP) of Rs545 (Rs500 earlier). Maintain ADD.

Result Highlights (Standalone)

* 1QFY25 headline performance: ITC’s 1QFY25 standalone revenue (adjusted for excise duty) was up 7.4% YoY to Rs170bn (vs est. Rs165bn). EBITDA was up by just 0.7% YoY to Rs63bn (vs est. Rs64bn). APAT was flattish YoY at Rs49.2bn (vs est. Rs50.7bn).

* Gross margin came in 220bps below our estimate at 57.7% (-180bps YoY and - 220bps QoQ). While EBITDA margin was down 250bps YoY at 37% (vs est. 39%).

* Cigarette revenue grew by 6.1% YoY to Rs79.2bn (1.8% below our est.), up ~7.8% on a 5-year CAGR basis. Net Segment Revenue (Net of Excise Duty/NCCD on Sales) up by 7%. We believe cigarette volume growth (calculated) stood at ~2% (vs our est. of 3% growth). Cig. business EBIT grew by 6.5% YoY with EBIT margins up by 30bps YoY to 62.6% (+50bps QoQ).

* FMCG-Others revenue grew by 6.3% YoY to Rs54.9bn (1.6% below our est.), up ~12.4% on a 5-year CAGR basis. Segment EBITDA margin stood at 11.3% (+25bps YoY); FMCG-Others EBIT margins was up 30bps YoY to 8.7%.

* Agri business was up 22.2% YoY to Rs69.7bn (28.7% above our est.) driven by value added agri products, leaf tobacco and wheat. Segment EBIT margin down 110bps YoY to 5.1%.

* Paperboards, Paper & Packaging (PPP) revenue was down 6.8% YoY (6.8% below our est.). Segment EBIT margin sharply down 910bps YoY to 13.2%. ? Hotels business saw a growth of 10.9% YoY (2.7% below our est.). Segment EBIT margin stood at 22% (+10bps YoY).

View & Valuation

There is 2.8%/1.7% downwards revision in our FY25E/FY26E earnings. We build a relatively subdued 9.6% EPS CAGR led by 10.3% revenue CAGR over FY24-FY26. Stability in taxes and recovery in rural markets should support growth in the near-term in its key businesses. PPP business which has been facing near term pressure from multiple issues but is now seeing greenshoots and base becomes low. Agri business should continue to see better growth going forward as export ban already into the base along with progressive scale-up of export shipments of Nicotine & Nicotine derivative products. Return ratios are expected to improve further led by hotel business demerger and no major capex in near-term. ITC is currently trading at ~28x/25x FY25E/FY26E EPS. Based on target multiple of ~26x (3yr/5yr avg fwd. multiple ~22x/20x) on Sep’26E EPS, we arrive at a revised TP of Rs545 (Rs500 earlier). Maintain ADD.

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