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Steady revenue growth but below expectation: ITC reported Q3FY24 gross sales of Rs 19,484.5cr, higher by 2.4% YoY/1.1% QoQ and net sales also grew in lower single digit by 1.8% YoY and 1.4% QoQ to Rs 18,019.4cr. The growth was driven largely by the hotel segment followed by FMCG and cigarettes while muted performance from Agri and paperboard segments dragged the revenue down.

Operating margin performance remains subdued: ITC posted gross profit of Rs 10,977.5cr, up by 1.6% YoY/2.5% QoQ but margins came in at 60.9%, a decline of 13bps YoY but an increase of 69bps QoQ. EBITDA was down by 3% YoY but marginally up by 0.8% to Rs 6,503.8cr with margin at 36.1%, down by 178bps YoY/22bps QoQ due to higher other expense and employee cost. PAT grew by 6.4% YoY/8.9% QoQ to Rs 5,406.5cr and margin expanded by 131bps YoY/207bps QoQ to 30%, as tax expense declined by 27.7% YoY/24.6% QoQ and rate was 19.2% of PBT for the quarter.

Mixed performance from cigarettes segment: Cigarettes segment revenue grew mixed with growth of 2.6% YoY to Rs 8,295cr and down marginally by 0.4% QoQ. On the profit front, it grew by 2.1% YoY to Rs 4,967cr but declined marginally by 0.7% sequentially. Further, in Q3FY24 its contribution from revenue and profits was at 42.6% and 74.3%, respectively. The topline growth came in on the higher base last year, while this quarter the growth continued from innovation of differentiated variants and growth from premium segment portfolio. However, on the bottom line sharp rise in cost was mitigated by improved mix, strategic cost management and calibrated pricing.

FMCG reported mixed performance: FMCG segment overall growth was mixed with revenue higher by 7.6% YoY to Rs 5,218.3cr while sequentially it declined by 1.6%. On the profit front, strong growth of 23.3% was reported YoY to Rs 434cr while sequentially a decline of 1.9%. FMCG contribution to revenue/profits stands at 26.8%/6.5%. Despite slowdown in consumer demand, FMCG performance was driven by Staples, Dairy, Beverages, Fragrances, Personal Wash, Homecare, Agarbattis, Classmate Notebooks & Pens. However, strong competition from local/regional players in categories such as Biscuits, Snacks, Noodles, popular Soaps impacted sentiments. Further, commodity prices environment remains mixed with wheat, maida, sugar etc. witnessed sequential uptick in prices while on the other hand focus on premiumization, supply chain optimization, digital initiatives and cost management led the growth. Going ahead, its focus remains on innovations, spending on building brands and consumer engagement.

Outlook & Valuation: ITC reported subdued numbers for the quarter with lower single digit revenue growth and muted margin performance. In the near term, there are challenges of commodity inflation of certain items and demand slowdown in rural areas but ahead their plan continues to grow its FMCG segment with focus on innovation and premiumization while at the same time their focus remains on consumers and increasing spending towards brand building, expanding distribution & channel reach. Meanwhile, the hotel de-merger plan is progressing well. We remain positive on the growth prospects ahead and financially have estimated its revenue/EBITDA/PAT to grow at 8.1%/10.2%/12.5% CAGR over FY23-26E. Thus, maintaining our Buy rating and a target price of Rs 535 on the stock, assigning a P/E multiple of 24x on FY26E EPS (similar to 10 years average P/E of 23.7x).

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