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Resilient cigarette, but muted FMCG performance

* ITC delivered a consolidated revenue growth of 8% YoY (in line) in 1QFY25. Gross cigarette revenue grew 6% YoY led by volume growth of ~3% YoY (in line), mix improvement, and price hikes. The premium cigarette segment continued to outperform; while the value segment sustained weakness.

* FMCG segments delivered 6% revenue growth, adversely impacted by the severe heat waves and slow packaged food growth. The margins were slightly hurt by rising competitive pressure (from local and regional players), increased commodity prices, and weak demand. EBIT margin stood at 8.7%. (est. 9.0%) in 1QFY25.

* The paper business continued to face challenges from demand issues, competition from China, lower pulp prices, and higher input costs, resulting in weak revenue and margins. Recovery is anticipated with improvements in domestic demand and a reduction in wood prices following the arrival of new crops. The agri business exhibited improvement during the quarter; however, stock limits on wheat and restrictions on exports continued to hurt the business. Hotels sustained healthy performance, though margins were hit by operating deleverage.

* We reiterate our BUY rating on ITC with an SOTP-based TP of INR575 (premised on 30x Jun’26E P/E).

Cigarette in line; other segments below expectations

* Consol. performance: ITC’s 1QFY25 net revenue grew 8% YoY to INR184.6b (est. INR183.6b). Consol. gross margin contracted ~130bp YoY to 60.5% (est. 62.5%) and EBITDA margin dipped 230bp YoY to 36.6% (est. 38.5%).

* Flat growth: EBITDA inched up 1% YoY to INR67.5b (est. INR70.7). PBT/Adj PAT remained flat YoY at INR69.3b (est. INR73.5b)/INR51.0b (est. INR54.3b).

* Cigarette volumes up ~3% YoY: Gross cigarette sales grew 6% YoY to INR88.4b (in line). Cigarette volume growth was expected to be ~3% (in line). EBIT rose 6% YoY to INR52.6b (in line). Cigarette EBIT margin expanded 30bp YoY to 59.4%.

* FMCG-Others sales grew 6% YoY (est. 8%) to INR55b; heat waves also hit part of the portfolio (more for beverage portfolio). EBIT grew 10% YoY to INR4.8b in 1QFY25. EBIT margin expanded 30bp to 8.7% (est. 9.0%).

* Hotels business sales rose 14% YoY to INR7.1b. The segmental EBIT declined 9% YoY to INR1.2b and the EBIT margin contracted 440bp YoY to 17.1%.

* The agri business exhibited improvement, and sales increased 22% YoY to INR70b. However, the segment reported a 2% YoY decline in EBIT to INR3.4b. EBIT margin contracted 120bp YoY to 4.9%.

* The paperboards business continued to experience contraction and clocked a 7% YoY decline in revenue to INR20.0b. EBIT declined 46% YoY to INR2.6b and EBIT margin contracted 930bp YoY to 13%.

Key management takeaways

* Cigarette volume growth stood at ~3% in 1QFY25.

* The pressure on tobacco costs, which was not reflected in 1Q, is expected to impact margins from 2Q.

* Competitive intensity remained high in categories such as Biscuits, Snacks, Noodles, Popular Soaps, and Education & Stationery Products, including competition from local and regional players.

* Commodity prices were largely stable during the quarter compared to the base period. However, commodities such as sugar, potatoes, choco cream, and edible oil experienced a sequential uptick in prices.

* The Paper business experienced stress due to Chinese market dumping, resulting in higher pulp and wood costs. Subdued realizations and increased domestic wood costs impacted margins. However, green shoots of recovery in domestic demand were also visible ahead of the festive season.

* In the paperboard business, improvement is anticipated as wood costs decrease with the harvesting of new crops, leading to ~20% margins in the business.

* Hotel business added 32 properties to its portfolio in the last 24 months (Jul’22- Jun’24) and plans to add 28 managed hotels in the next 24 months (Jul’24- Jun’26).

Valuation and view

* There are no material changes to our EPS estimates for FY25 and FY26.

* ITC’s core businesses of cigarettes and FMCG are witnessing steady growth. FMCG continues to enjoy industry leading growth over peers due to ITC’s category presence (large unorganized mix, under-penetrated, etc.). Consistent margin improvement further provides confidence in growth without compromising profitability.

* After the demerger of its asset-heavy hotels business, ITC's return profile will also improve. Margin improvements in the other FMCG business will further enhance return ratios and valuation multiples.

* Capital efficiency will further improve operating cash flow, leading to a healthy, sustainable dividend yield (3-4%).

* With a stable tax on cigarettes, we anticipate sustainable growth in the business. We value the cigarette business at 20x Jun’26 EV/EBITDA (earlier 17x EV/EBITDA). We reiterate our BUY rating with an SOTP-based TP of INR575 (implied 30x Jun’26E EPS).

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