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-      ITC’s revenue growth of 1.6% in 3QFY24 came in significantly below our estimate of 5.7% growth, as cigarette volume declined 1-2% YoY (est. 2% growth) on a high base of 15% growth in 3QFY23. The four-year volume CAGR stood at 5%. The premium cigarette segment continued to outperform, while the value segment saw weakness.

-      The performance of other FMCG segments remained resilient, with 7.3% revenue growth. The contribution of digital and modern trade businesses was significant at 31% of revenue. Despite rising competitive pressure (local, regional players) and weak demand, ITC sustained EBITDA margin expansion.

-      The Agri business continued to be impacted by government restrictions. The Paper segment is facing challenges, including demand issues, competition from China, lower pulp prices, and higher input costs, although signs of a sectoral revival are emerging. The Hotel segment posted a robust performance, with strong growth in the average room rate (ARR) and occupancy.

-      We retain our BUY rating on ITC as we believe its earnings visibility remains better than that of peers. Our TP of INR515 is based on SoTP valuations.

Cigarette volumes miss estimates; FMCG sustains healthy trend

-      ITC’s 3QFY24 net revenue grew 1.6% YoY to INR164.8b (est. INR171.6b) on a high base of last year. EBITDA declined 3.2% YoY to INR60.2b (est. INR63.9b). PBT was flat YoY at INR67.3b (est. INR67.2b), while adj. PAT grew 10.9% YoY to INR55.8b (est. INR50.7b).

-      Cigarette volumes declined 1% YoY (est. +2%), with a four-year CAGR steady at 5%. Gross cigarette sales grew 3.6% YoY to INR75.5b, while net sales were up by 2% YoY. Cigarette EBIT margin was largely steady at 62.6%.

-      FMCG-Others sales grew 7.6% YoY to INR52.1b amid a challenging demand environment. EBIT grew 24.1% YoY to INR4.3b. EBITDA margin was at 11%.

-      Hotels business sales grew 18.2% YoY to INR8.4b, EBIT grew 57.1% YoY to INR2.3b, and EBIT margin expanded by 680bp YoY to 27.3%.

-      Agri business sales declined 2.2% YoY to INR30.5b, EBIT declined 13.3% YoY to INR3.4b, and EBIT margin contracted by 140bp YoY to 11.1%.

-      Paperboards business continued to see contraction, with revenue down 9.7% YoY to INR20.8b. EBIT declined 51.2% YoY to INR3.0b, while EBIT margin contracted 1,210bp YoY to 14.2%.

-      Gross margin contracted ~40bp YoY to 58.4% (est. 57.4%), while EBITDA margin was down 180bp YoY and flat QoQ at 36.5% (est. 37.3%).

-      In 9MFY24, net sales declined 1.6% YoY, while EBITDA/adj. PAT grew 3.3%/12.7% YoY.

-      The board declared an interim dividend of INR6.25/share.

Other takeaways

-      Cigarette business volume was down by 1-2% for the quarter, influenced by pricing and other factors. However, growth was lower due to a high base of 15% last year. The four-year CAGR stood at 4-5%.

-      The premium and differentiated cigarette portfolios are performing well, contributing 20-25% to the overall portfolio. However, there is continued pressure in the value segment. The premium portfolio, which is growing faster than others, serves as a growth driver going ahead.

-      In the steady state, cigarettes can sustain low to mid-single digit volume growth in the medium term.

-      Cigarette channel inventory is normal.

-      In other FMCG businesses, premium soap, aata, and biscuit categories performed well, while the noodles and snacks categories faced pressure from value and local competition. Anticipated value growth in FMCG suggests improved performance in this category.

-      Wheat, maida, and sugar prices are on an upward trend, while edible oil prices continue to decline compared to last year.

-      FMCG EBITDA margin trajectory is in line with the medium-term guidance.

-      The agriculture business is focused on trading, and a new nicotine plant is set to commence operations in Mar’24.

-      The paper business is under stress due to China's dumping in the international market, leading to increased pulp and wood costs. However, there are signs of improvement in this sector.

 Valuation and view

-      There are no material changes to our EPS estimates for FY24, while we cut our FY25E EPS by 6.2%.

-      The resilient nature of ITC’s core business amid an uncertain environment in the sector, along with a 3-4% dividend yield, makes it a good defensive bet in the ongoing volatile interest rate environment.

-      The earning CAGR at the PBT level stood at 8.5% over FY18-23. We expect ITC to post a c.7% earnings CAGR over FY24-26. We reiterate our BUY rating with a TP of INR 515, based on SoTP valuation.

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