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Resilient print despite challenges

* ITC delivered consolidated revenue growth of 17% YoY (beat) in 2QFY25, due to high growth in agri business. Core business performance was largely in line with estimates despite several challenges.

* Gross cigarette revenue grew by 7%, driven by volume growth of ~3.5% YoY (in line), pricing growth of 1-2% and better mix. Premium cigarette segment continued to outperform. EBIT growth was 5% YoY (in line).

* FMCG segment delivered 5% revenue growth (7% growth excl. notebook business) in a challenging environment. The company witnessed healthy demand from both urban and rural markets. Excessive rains in parts of the country also impacted a part of the portfolio. Notebooks impacted by a high base effect and local competition on a sharp drop in paper prices. Margins were impacted slightly by rising competitive pressure (local, regional players), increased commodity prices and weak demand. EBIT margin was at 8.0%. (est. 8.2%).

* Paper business continued to face challenges from soft demand, increased competition (low-cost Chinese imports), declining pulp prices, and rising input costs. Revenue growth was 2% and EBIT margin contracted 400bp to 11.1% (all-time low). Recovery is expected to be delayed to FY26 following the arrival of new crops.

* Agri business saw strong growth of 47%, led by leaf tobacco and valueadded agri products. EBIT margins impacted by a rise in green leaf tobacco costs. Hotels maintained healthy revenue growth, up 17% YoY.

* We retain our BUY rating on ITC with our SOTP-based TP of INR575 (implied 30x Sep’26E P/E).

Beat on sales; core business remains healthy

* Consolidated performance: ITC’s 2QFY25 net revenue grew by 17% YoY to INR207.6b (est. INR187.6b), mainly led by agri business and hotels.

* Consolidated gross margin contracted by ~430bp YoY to 55.9% (est. 61%), impacted by high food inflation, unfavorable mix (high agri growth) and escalation in certain input costs (leaf, wood, etc.).

* EBITDA grew by 5% YoY to INR67.6b (est. INR67.1). PBT/adj. PAT grew by 3%/2% YoY to INR68.4b (est. INR69.3b)/INR49.9b (est. INR51.2b).

* Cigarette volumes up ~3.5% YoY: Gross cigarette sales grew 7% YoY to INR88.8b (est. INR88.3). Cigarette volume growth is expected to be ~3.5% (in line). EBIT grew by 5% YoY to INR52.4b (in line). Cigarette EBIT margin contracted 100bp YoY to 59.0%.

* FMCG-Others sales grew 5% YoY to INR55.8b (est. INR55.7b). EBIT was flat YoY at INR4.4b. EBIT margin contracted by 40bp to 8.0% (est. 8.2%).

* Hotel business sales grew by 17% YoY to INR7.9b, EBIT declined 12% YoY to INR1.2b, and EBIT margin contracted by 490bp YoY to 14.8% (10-quarter low).

* Agri business saw strong growth as sales jumped 47% YoY to INR58.4b. EBIT grew by 25% YoY to INR4.5b and EBIT margin contracted 140bp YoY to 7.6%.

* Paperboards business remained soft and grew 2% YoY to INR21.1b. EBIT declined 25% YoY to INR2.3b and EBIT margin contracted 410bp YoY to 11.1% (all-time low).

* In 1HFY25, net sales/EBITDA/APAT grew 12%/3%/1%. In 2HFY25, we model net sales/EBITDA/APAT growth of 7%/6%/3%.

Key takeaways

* In cigarette, premium and differentiated offerings, such as Classic Connect and Gold Flake Social, continued to perform well.

* Sharp cost escalation in leaf tobacco was partly mitigated through an improved product mix, calibrated pricing actions, and strategic cost control.

* FMCG showed resilience despite challenges like subdued demand, high inflation, and unseasonal rains.

* Intense competition, especially from local players, was noted in categories like noodles, snacks, biscuits, and popular soaps. ITC’s focus remained on product differentiation and premium offerings to counter this competition.

* The paperboards, paper, and packaging segment faced challenges due to lowpriced Chinese imports affecting global markets (including India), soft domestic demand, surge in domestic wood costs, and subdued realizations due to increased competition and costs.

* Strong agri performance was led by leaf tobacco and value-added agri products like coffee, fruits & vegetables, and spices.

* In hotels, over the last 24 months, 30 properties have been added to ITC's portfolio, with plans to add 28 more in the next 24 months.

*  The National Company Law Tribunal (NCLT) sanctioned the demerger of ITC Hotels from ITC Limited, with the scheme expected to become effective upon filing the NCLT’s order.

Valuation and view 

* There are no material changes to our EPS estimates for FY25 and FY26.

* ITC’s core businesses of cigarette and FMCG are seeing steady growth. FMCG continues to enjoy industry-leading growth over peers due to ITC’s category presence (large unorganized mix, under-penetrated, etc.).

* After the demerger of its asset-heavy hotel business, ITC's return profile will also improve.

* Capital efficiency will further improve operating cash flow, leading to a healthy sustainable dividend yield (3-4%).

*   With the stable tax on cigarettes, we anticipate sustainable growth in business and value it at 20x Sep’26E EV/EBITDA. Reiterate our BUY rating with our SOTPbased TP of INR575 (implied 30x Sep’26E EPS).

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