ITC Rating- Add - Strong show, quarter after quarter

ITC Rating: Add | Strong show, quarter after quarter

ITC reported another well-rounded quarter with (i) cigarette revenue growth of 23.3% y-o-y, led by about 20-21% volume growth (3-year volume CAGR of 5%) and Ebit growth of 23.6% y-o-y (3-year CAGR of 4.8%), (ii) FMCG business growth of 21% y-o-y and flat Ebit margin y-o-y (6.6%) despite inflationary headwinds, (iv) new decadal-high paperboards Ebit margin, and (v) consecutive `5 bn+ topline quarter for hotels. We upgrade FY2023-24 EPS estimates by 5-6%, roll over and revise FV to Rs 380 (from Rs 337). Maintain ADD.

Q2FY23—ahead of expectations on all frontsRevenues grew 26.7% y-o-y to Rs 161.3 bn, 1.9%. Gross revenues, excluding the agri business, were 4.6% above our estimates. Ebitda grew 27.1% y-o-y to Rs 58.6 bn, 6.8% ahead of our estimate. Staff costs grew 24.3% y-o-y and other expenses grew 24.8% y-o-y.

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We raise FY2023-24 EPS estimates by 5-6%, roll over and revise FV to Rs 380; ADDWe raise FY2023-24 EPS estimates by 6%, roll over and revise SoTP-based FV to Rs 380 (from Rs 337). We ascribe 15X December 2024E PE (14X earlier) to the cigarettes segment. In our view, further re-rating warrants an acceleration in cigarettes Ebit growth to high-single digit CAGR from mid-single digit CAGR at present (our base case), which in turn hinges on (i) a stable tax regime for a foreseeable future and (ii) clamp-down of illicit trade by enforcement agencies.

Highlights:Cigarette business: The segment registered 23.3% y-o-y (3-yr CAGR: 9.3%) revenue growth (20-21% y-o-y volume growth as per our estimate, implying +5% 3-yr CAGR), led by stability in taxes and enforcement agencies’ measures against illicit trade.

FMCG business: The FMCG business’ revenues grew 21% y-o-y, led by (i) robust growth in staples and convenience foods, driven by biscuits, atta and noodles, (ii) strong performance by discretionary/out-of-home categories, (iii) encouraging trends in Fiama and Vivel range of personal wash products, and (iv) strong traction in education and stationery products business.

Hotels: ITC’s hotels witnessed another stellar quarter across locations with overall revenues up 81.8% y-o-y and Ebitda margin at 29%. Segment Ebit margin stood at 15.7% in Q2FY23 versus 4.1% in Q2FY20.