Buy ITC Ltd For Target Rs. 535 - Motilal Oswal Financial Services Ltd
Earning visibility continues to drive performance
The management of ITC held an analyst meeting where each business head and the senior management team delivered a comprehensive overview of their respective businesses.
? Despite the challenges posed by the pandemic, inflation, and taxation, ITC demonstrated better performance, achieving a revenue CAGR of 10% and PAT CAGR of 11.6% over FY18-23.
? The overall consumption growth in the industry has been better in urban areas than the rural regions. Although there are signs of improvement in rural markets, its sustainability remains uncertain. The premium portfolio is thriving, particularly in urban settings.
? Non-Cigarette Business Outperformance: The non-cigarette segment outperformed, exhibiting a robust Revenue CAGR of 14% and a remarkable PAT CAGR of 20% over FY18-23. This impressive performance was accompanied by a notable improvement in EBITDA margin contribution, which increased 920bp to 27.3%. Return on Capital Employed (RoCE) doubled, reaching 22% from an initial 11% in FY18.
? Growth Drivers and Market Trends: The growth narrative is shaped by various drivers, including urbanization, nuclearization, an aging population with increased spending capacity, the rise of online shoppers, expanding internet penetration, and a growing per capita income.
? Strategic Growth Framework: ITC adopts a three-pronged horizon growth framework: a) Extending and defending the core business. b) Building emerging businesses, such as beverages, frozen foods, liquid wash, homecare, and nicotine, and c) Creating visible options for future growth opportunities, including chocolates, premium skincare, and food tech.
? Cost Optimization and Productivity Enhancement: The company is committed to optimizing costs and enhancing productivity through strategic initiatives, including ICMLs, vertical integration, import substitution, digitalization, and the utilization of renewable energy sources.
? Omni-channel Network Strengthening: ITC boasts a smart omni-channel network, consolidating a robust presence in general trade, modern trade, and e-commerce. The coverage in the general trade market experienced a threefold surge and the stockiest network expanded by eightfold, comparing FY23 to FY18. The company also scaled up in modern trade and e-commerce, increasing the share to 25% in FY23 from 17% in FY20.
? Capex plan - Capital allocation is a strategic process that entails investing in driving business innovation, nurturing future business generations such as food tech, and capitalizing on inorganic or M&A opportunities. ~35% of investments are in FMCG, 30-35% in the paper business, and the rest in agri/tech and sustainability.
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SEBI Registration number is INH000000412