IGI Logo

New opportunities - Food Tech & Nicotine exports

We participated in the Institutional Investors & Financial Analysts Day held by ITC Ltd. (ITC) in Mumbai. The management team took us through the current market standing across business segments, capabilities in innovation, growth vectors (core, emerging, future), digital initiatives, structural interventions taken across value chain and sustainability initiatives. We haven’t made any major changes to our earnings estimates through this update. The stock is currently trading at ~27x/24x/23x FY24E/FY25E/FY26E EPS. Based on target multiple of ~26x (3yr/5yr avg fwd. multiple ~20x), we arrive at a target price (TP) of Rs505, maintaining our ADD rating.

Analyst Meet – Key updates: -

? There are some greenshoots visible in rural areas post correction in product prices, but no major recovery seen. ITC is expecting better growth in couple of quarters.

? There is continuous engagement with the policy makers and a sense of understanding regarding illicit trade. There is also data to show that there is increase in tax revenues to exchequer from the legal cigarette industry during periods of tax stability (Period 1: Apr 18 to Jan 20 over Jul 17 to Mar 18 and Period 2: Apr 22 to Jan 23 over Oct 21 to Mar 22) led by recouping volumes from illicit trade. Relative stability in taxes, claw back from illicit trade, focused portfolio/market interventions and agile execution has meant that cigarette volumes have reached almost similar levels (0.96x in FY23) of FY13 volumes.

? New launch offers in cigarettes have increased >5x over the last 5 years and now account for ~17% of the overall volumes.

? Company continues to aspire 80-100bps annual expansion in FMCG-Other (FMCGO) segment margins led by value-added products (VADP)/premiumization contributing to around 30-40bps, scale contributing to ~20bps and cost optimization (freight optimization, ICML efficiencies, etc.) contributing for the rest.

? Paperboards, Paper & Packaging (PPP) is a cyclical business and has hit a downcycle in recent times, impact of which is sharper this time. Management believes this impact to have bottomed-out and will start seeing an improvement from next quarter.

? ITC has identified Food Tech services as a new vector of growth and believes the opportunity is big. Started from the Cloud Kitchen of ITC Windsor in 2021, it currently has three brands– ITC Aashirvaad Soul Creations, ITC Master Chef Creations and ITC Sunfeast Baked Creations. Some of the older kitchens are already doing ~15% margins at kitchen level. It believes there are multiple levers to grow the business. Company has already figured out the product-market fit through the Bangalore market with a current footprint of 19 Cloud Kitchens catering to almost the entire city (opening cloud kitchens in Chennai now and then Mumbai). Currently trying to build a strong back-end for scaling-up but in an efficient manner. It believes the biggest challenge in the business is getting the right real estate.

? ITC is looking at Nicotine & Derivatives in Value-added Tobacco as a big new opportunity for exports. High-end Nicotine and nicotine-based products are a huge market opportunity due to the increased use of vapes and oral pouches. It is a niche segment and requires pharma-level sophistication. There is a shortage of high-quality Nicotine producers globally. Management believes Indian tobaccos are at the sweet spot (in terms of nicotine content vs price equation). Conventional exports are largely at the commodity end. Companies are looking for ESGcompliant supply chains. There are also high barriers to entry for high-end Nicotine extraction in India mostly led by sourcing capabilities. ITC has still not started bulk shipments but aims to double the nicotine business in the medium-term. It also has sustainable high margins (50%) compared to traditional tobacco.

Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632