Buy ITC Ltd For Target Rs.550 by Motilal Oswal Financial Services Ltd
Beat in cigarette volume; FMCG remains muted
* ITC delivered consolidated revenue growth (ex-hotel business) of 9% YoY (beat) in 3QFY25, mainly led by the cigarette business. EBITDA grew by 2% YoY to INR63.6b. APAT declined 7% YoY to INR48b.
* Gross cigarette revenue rose 8% (est. 7%). Cigarette volume growth was better than expected at ~6% (vs. est. 4%), partially supported by a favorable base (-2% in 3QFY24). The premium cigarette segment continued to outperform. Cigarette’s EBIT growth was slow at 5% YoY (est. 6% YoY). EBIT margin contracted 180bp YoY to 58.0%, partially impacted by the sharp escalation in the leaf tobacco cost.
* The FMCG segment revenue grew 4% (5% ex-notebooks), impacted by food and edible oil inflation. This was partially offset by the pricing adjustments, improved product mix, and cost efficiencies. Notebooks were impacted by a high base effect and local competition, driven by a sharp decline in paper prices. EBIT margin contracted 240bp to 5.9% (est. 7.7%), marking a 10- quarter low. This was due to the rising competition, higher commodity costs, and weak demand, which led to a 26% YoY EBIT decline.
* The paper business struggled with weak demand, rising low-cost Chinese imports, falling pulp prices, and increasing input costs. Revenue grew 3% and EBIT margin contracted 500bp to 9.2% (all-time low). A partial recovery is expected by FY26-end as new crops arrive.
* Agri business revenue increased 11%, driven by leaf tobacco and valueadded agri products, with EBIT margin expansion of 210bp YoY to 13.7%. Hotels maintained strong growth, with revenue up 15% YoY (now demerged).
* We cut our EPS estimates by 4% for FY25 and 5% for FY26, mainly due to the impact of the hotel business demerger w.e.f. Jan’25. We reiterate our BUY rating on ITC with our SOTP-based TP of INR550 (implied 30x Dec’26E P/E).
Cigarette volume growth at ~6%; FMCG performance muted
* Consolidated performance (Ex-hotel business): ITC’s 3QFY25 net revenue grew by 9% YoY at INR187.9b (est. INR182.1b), mainly led by the cigarette business. Consolidated gross margin contracted by ~180bp YoY to 57.6%, impacted by high food inflation and the rise of certain input costs (leaf, wood, etc). EBITDA grew by 2% YoY to INR63.6b. APAT declined 7% YoY to INR48b.
* Cigarette volumes up ~6%, with 5% EBIT growth: Gross cigarette sales grew 8% YoY to INR89.4b (est. INR88.8b). Cigarette volume growth was ~6% (est. 4%), partially also supported by a favorable base (~-2% in 3QFY25). Differentiated and premium offerings continue to perform well. EBIT growth was slower than the revenue growth, posting 5% YoY growth to INR51.9b (est. INR52.5b). The sharp escalation in the leaf tobacco cost was partly offset by the improved product mix.
* FMCG - Others sales grew 4% YoY to INR54.3b (est. INR54.8b), while exnotebook growth was at 5%. Notebooks were impacted by a high base effect and opportunistic play by local brands, driven by a sharp decline in paper prices. EBIT declined 26% YoY to INR3.2b (est. INR4.2bn) in 3QFY25. EBIT margin contracted 240bp to 5.9% (est. 7.7%), marking a 10-quarter low. Severe inflationary pressures were experienced across key inputs such as edible oil, wheat, maida, potato, cocoa, and packaging materials during the quarter.
* Agri business sales increased by 11% YoY to INR36.3b (est. INR38.3b). EBIT grew by 30% YoY to INR5.0b. EBIT margin expanded by 210bp YoY to 13.7% (est. 9.7%), marking a 28-quarter high.
* Paperboards business sales grew 3% YoY to INR21.4b (est. INR21.6b). EBIT declined 33% YoY to INR2.0b and EBIT margin contracted 500bp YoY to 9.2% (est. 11.8%; all-time low). It was impacted by low-priced Chinese and Indonesian imports, soft domestic demand, and a sharp rise in wood prices.
* Hotel business revenue was up 15% YoY to INR9.2b. Following the demerger on 1 st Jan’25, the business has been recorded as a discontinued operation in the financial results.
Valuation and view
* We cut our EPS estimates by 4% for FY25 and 5% for FY26, mainly due to the demerger of the hotel business w.e.f. Jan’25.
* ITC’s core business of cigarettes has shown steady performance. With stable taxes on cigarettes, we anticipate sustainable growth in this business. While the FMCG sector is seeing moderation due to the rising commodity prices, ITC is enjoying industry-leading growth over peers due to its category presence (large unorganized mix, under-penetrated, etc.).
* We reiterate our BUY rating on ITC with our SOTP-based TP of INR550 (implied 30x Dec’26E P/E).
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