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ITC’s Q3FY24 print was below our estimates; revenue/PAT grew by 1.4%/10.9% while EBITDA cut by 3.7%. On a high base cigarette net sales/EBIT grew 1.2%/2.3% yet with 16% growth in the base, cigarette volume declined ~1-2%. FMCG revenue/EBIT grew at 7.6%/24.1%, led by, (1) ~3% volume growth, (2) strong growth in staples/convenience food, education stationary and personal wash, (3) rapid scale up in digital and MT – 31% of sales, and (4) accelerating premiumisation. Hotels revenue/EBIT grew 18.2%/57%, yet revenues for Agri/Paper declined by 2.2%/9.7% (ex. Wheat/ rice exports +14.2%). Gross Margins remained flat at 58.0% (-50bp YoY) while improved 110bp QoQ despite higher RM/PM prices and leaf tobacco exports. EBITDA margin at 35.9% (-191bp) YoY, driven by healthy mix of price in FMCG, margin recovery in hotels, and better mix in agri, led by value add agri/leaf tobacco. We argued in our Thematic report that with strong operating leverage and improved product-mix, FMCG segment to deliver 12.9% EBITDA margin (Mar’24). With lower 9MFY24 performance we tweaked our earnings and retain BUY with a revised DCF-based TP of Rs556 (implying 29.4 avg. FY25E/FY26E EPS). Resilient performance in FMCG, yet lower exports cut agri revenues and high base in Paper

ITC-next-strategy across business verticals places emphasis on inclusive, future ready and consumer centric approach meeting fast-evolving consumer preferences and consumption patterns. That said FMCG-foods scale-up delivered revenue/volume growth of 7.6%/~3%. Moreover, stability in taxation and cut in illicit trade, and product innovation, despite high base in cigarette net sales grew 1.2% (2-year CAGR 9.3%), yet with 16% growth in base, cigarette volumes declined ~1-2%. Management indicated despite sharp escalation in RM/PM prices in cigarette business industry has delayed price increases due to weak volumes. We expect with stable prices cigarette business is now in a good position to capture further market share. With improved operating metrics, backed by strong occupancy rate/ARR, hotel business grew 18.2%, while subdued demand, higher export from China in globally cut Paper segment revenues by 9.7%. Agri business declined by 2.2% due to govt. policy interventions (ex. Wheat/rice export +14.2%).

Strong margin trajectory – Cigarette/FMCG EBIT grew 2.3%/24.1%, FMCG EBITDA at 11%

With strong revenue growth in cigarette/FMCG-foods portfolio segmental EBIT grew 2.3%/24.1% driven by (1) strategic cost management, (2) premiumisation, (3) supply chain agility, and (4) judicious pricing actions. That said, ITC’s gross/EBITDA margin increased to 58.0%/35.9% in Q3. FMCG/Hotel EBITDA margin risen to 11.0%/36.2% (+100bp/+470bp), driven by operating leverage yet EBIT for Agri/Paper segment declined 13.3%/51.2% led by weak revenues. We expect recovery in margin for Agri/Paper business in FY25.

Valuation and risks We believe with steady prices, the legal industry has been able to recoup volumes from illegal cigarettes, yet calibrated price increases holding strong demand for KFST/RSFT segment. We expect FMCG EBITDA/EBIT to move up to 12.9%/8.9% in FY24. With clarity on hotel demerger (value unlocking), we expect investor’s focus to shift on core fundamentals of the business such as growth momentum and margin trajectory. ITC declared interim dividend of Rs6.25 per share. Considering moderate outlook, we cut FY24/25E earnings by 4.4%/6.8% and retain BUY, with a revised DCF-based TP of Rs556 (implying 29.4x FY25E/FY26E EPS). Risk: rising competitive intensity.

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