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Below expectations overall

ITC’s Dec-Q earnings were below expectations overall. Cigarettes performance looked muted yoy (volumes down c.2%) but longer-range data suggests a healthier state of affairs (4yr CAGR of c.4% - tad below Sep-Q’s c.5% but better than the preceding two quarters). Notably, the Sep-to-Dec sequential volume uptick was steeper-than-trend last year, and there were also some weather-related disruptions in some key markets during the quarter. FMCG continued to do well despite a challenging macro; growth has moderated but better vs peers; margin improvement trajectory remained strong. Hotels was a stand-out contributor this time round. Paperboard and Agri, however, remained under severe pressure causing significant drag in overall profitability. We expect stock to be muted in the near-term given a weaker overall environment, though we reckon there is potential for re-rating given a sharper capitalallocation strategy.

Below expectations overall but FMCG turned in a resilient performance in a challenging environment: ITC’s overall sales grew 2.1% to INR 174.8bn, EBITDA declined 3.2% to INR 60.2bn and adjusted net profit grew by 1.5%INR 51.1bn. The Hotels segment was a standout performer this time round with a significant beat on both topline and profits. FMCG performance was on expected lines – growth was resilient at 7.6% and margin continued to improve. Growth in FMCG was driven by Staples, Dairy, Beverages, HPC, Stationery while Biscuits, Snacks, Noodles, popular-end Soaps had to deal with increased competitive intensity including from local and regional players. FMCG EBITDA margin has been steady at 11% YTD vs 9.1% LY – helped by multi-pronged interventions relating to premiumisation, supply-chain, digital initiatives and some judicious pricing actions.

Cigarettes business consolidated on a high base after a period of sustained growth momentum: Cigarette volumes declined during c.2% during the quarter, as per our workings. There was, however, an element of base effect here as sequential volume uptick in 3Q last year was tad higher than trend levels. When seen on a normalised basis (4yr CAGR), cigarette volumes grew c.4% during Dec-Q which is in the ballpark of that seen in recent few quarters. Cigarettes revenue grew by 3.6% (4yr CAGR of c.9%) driven by better mix and pricing. Premium segments and differentiated variants continued to perform well. Cigarette net margin was flattish yoy as higher taxes and costs escalation were mitigated by better mix, strategic costs interventions and calibrated price-hikes.

Hotels was a standout performer but Paperboards and Agri were under severe pressure: 1) Paperboards reported another very weak quarter with sales down 9.7% due to subdued domestic demand and excess low-priced Chinese supplies in the global market. Scale deleverage, lower realisations and sharp escalation in wood costs led to a steep c.51% decline in EBIT. 2) Agri revenue fell 2.2% due to certain restrictions placed in a few of the commodities to ensure food security and control inflation. EBIT declined by a steeper 13.3%. 3) Hotels delivered a strong quarter with 18% growth in revenue helped by strong ARR and Occupancy growth across properties. EBITDA margin improvement of 475bps to 36.2% was led by higher ARR, operating leverage, benefits from costs initiatives, and drove a 36% growth in Hotels EBITDA during the quarter.

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