Add ITC Ltd for the Target Rs 310 by Emkay Global Financial Services Ltd
ITC’s 1QFY27 results missed expectations. Revenue fell 14% yoy (9% below consensus’) mainly due to the 26% decline in cigarette net sales. EBITDA/adj PAT declined 28/27%, coming in 16/18% below consensus’ expectations. Cigarette volumes declined by a mid-single-digit yoy (vs our expectation of a high single digit). The EBIT decline in cigarette was much sharper (down 35% yoy) than our expectation of ~-25%, it was the lowest for ITC among the three listed players (GPI, VST). We expect the EBIT decline to be gradually lower in coming quarters due to further price hikes and full impact of previous price hikes flowing through. FMCG grew strongly at 12% yoy (16% ex-staples) with EBITDA margin expansion of 30bps yoy. Agri sales were impacted by the West Asia conflict. Paper business saw robust growth with improving margins. We slightly adjust our estimates (Exhibit 18) and now expect sales/earnings CAGR of ~8/3% over FY26-29E. While the stock seems attractive at current valuation (~18x 1YF PER), we think uncertainty regarding the extent and timing of future price hikes in cigarettes and their impact on volume will remain an overhang; hence, we retain ADD and SOTP-based TP of Rs310.
1QFY27 result summary
Revenue declined ~14% yoy on a high base of ~26% growth, impacted by the unprecedented hike in excise duty wef 1-Feb-26 (9% below consensus’ and 14% below our estimates). We believe Cigarette volume declined ~5% yoy, which is better than our estimate of a 9% fall (GPI: -2%; VST: -14%). Gross margin was flattish yoy at ~49%, aided by staggered pricing actions. EBITDA declined ~28% yoy and missed our/consensus’ expectations by ~16/18%. Adj PAT declined 27% yoy and was 18% below expectations. ITC's cigarette EBIT declined 35% yoy lower than the decline witnessed by GPI (-52%) and VST (-41%).
Key takeaways from the performance of categories
Cigarette net revenue fell ~26% yoy due to the sharp tax hike, while EBIT contracted ~35% yoy as the company did not completely pass on the tax hike. It took >30 portfolio re-architecting actions in 1Q. FMCG revenue grew ~12% yoy (~16% ex-Staples) and EBITDA grew ~16% yoy, with margins up by ~30bps to ~9.7% (~55bps ex-Sresta). Growth was led by Dairy/Snacks/Noodles/Frozen (>20%) while Personal Care grew in mid-teens. Digital/Organic business ARR reached ~Rs15bn. Agri revenue (-14% yoy; +9% yoy adjusted) and EBIT (-18% yoy) faced high bases and West Asia disruptions, yet margins held flat. Paperboards, Paper, and Packaging revenue grew 9% yoy and EBIT grew 38% yoy (margins up by 200bps to ~9.7%) on volume/realization momentum, softer wood costs, and packaging strength, supported by active import trade representations (Virgin Multi-layer MIP extended to Sep-26; Indonesian ADD recommended). Others delivered strong performance across group entities, anchored by Fresh Food GMV growing ~90% yoy (ARR: >Rs3bn; 75 cloud kitchens).
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