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Operating performance below estimates

ITC Ltd. (ITC) 3QFY24 operating performance was below estimates while PAT was aided by higher other income and tax credit. Cigarette volumes were subdued largely due to base effect. FMCG-Others grew 7.6%, impacted by subdued demand, with EBITDA margin stable at 11% for three consecutive quarters. Trade restrictions on agri commodities continue to impact ITC’s Agri business. Segment likely to see some benefit starting 4QFY24 with expected commencement of export shipments of Nicotine and Nicotine derivative products. Paperboards, Paper and Packaging (PPP) segment continue to remain impacted by low priced Chinese supplies in global markets, muted domestic demand, surge in wood cost and high base effect. Based on unchanged target multiple of ~26x (3yr/5yr avg fwd. multiple ~20x), we arrive at a target price (TP) of Rs500. Maintain ADD.

Result Highlights (Standalone)

3QFY24 headline performance: Standalone revenue (adjusted for excise duty) was up just 1.6% YoY to Rs164.8bn (vs est. Rs174.8bn). EBITDA was down 3.2% YoY to Rs60.2bn (vs est. Rs67.3bn). PAT was up 10.9% YoY to Rs55.8bn (vs est. Rs53.9bn). Excluding tax credit of ~Rs4.7bn, PAT growth stood at ~1.6% (5.2% below our APAT estimate).

Cigarette revenue grew by 3.6% YoY to Rs75.5bn (5.4% below our est.), up ~9.2% on a 4-year CAGR basis. Net Segment Revenue (Net of Excise Duty/NCCD on Sales) up by 2.3%. We believe cigarette volume growth (calculated) to be flattish to slightly negative (vs our est. of 3% growth). Differentiated variants and premium segment continue to perform well. Cig. business EBIT grew by 2.3% YoY with EBIT margins down by 80bps YoY to 62.6% (+20bps QoQ).

FMCG-Others revenue grew by 7.6% YoY to Rs52bn (1.7% below our est.), up ~12% on a 4-year CAGR basis. Segment EBITDA margin stood at 11% (+100bps YoY but flat QoQ). EBIT margin was up 110bps YoY to 8.3% (flat QoQ).

Paperboards, Paper & Packaging (PPP) revenue was down 9.7% YoY (7% below our est.). Segment EBIT margin down sharply 1210bps YoY to 14.2%

Agri business was down 2.2% YoY to Rs30.5bn (15% below our est.). Segment EBIT margin down 140bps YoY to 11.1%.

Hotels business saw a growth of 18.2% YoY (2.8% above our est.). Segment EBIT margin stood at 27.3% (+680bps YoY).

Gross margin came in 60bps below our estimate at 58.4% (-40bps YoY but up 110bps QoQ). EBITDA margin was down 180bps YoY at 36.5% (vs our est. 38.5%).

View & Valuation

There is no major change in our FY24E/FY25E/FY26E EPS. Some of the factors which supported growth in FY22/23 have now normalized. Additionally, PPP business has been facing near term pressure from multiple issues but looks to have bottomed-out. On the other hand, Agri business should see growth going forward as export ban comes into base along with support from export shipments of Nicotine and Nicotine derivative products. Return ratios improved in FY23 and are expected to improve further led by hotel business demerger and no major capex in near term. We build a relatively subdued ~10% EPS CAGR led by 10.6% revenue CAGR over FY24E-FY26E. The stock is currently trading at ~27x/25x/23x FY24E/FY25E/FY26E EPS. Based on target multiple of ~26x (3yr/5yr avg fwd. multiple ~20x), we arrive at a revised TP of Rs500 (Rs505 earlier), thus maintain our ADD rating.

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