ITC posted a healthy core business during the first quarter of FY24 with cigarette and FMCG segment leading growth. Analysts said that the next term outlook for the conglomerate remained strong with FMCG growth ahead of industry and cigarette volume growth supported by stability in taxes, and volume recovery from illicit trade. Further, the hotel outlook remained strong with higher ARR and occupancy outlook. Amnish Aggarwal, Head Of Research, Prabhudas Lilladher Pvt Ltd, said, “Outlook remains positive although we expect growth to moderate to mid-single digits in the medium term. FMCG growth was ahead of industry and margins got a boost due to improving scale, lower raw material costs and PLI incentives, we expect calibrated margin expansion to sustain in coming years. Hotel outlook is positive due to the G20 and revival in business and foreign tourist travel. Paper and Paperboard segment has started showing QoQ margin expansion and margins are expected to sustain around current levels.” He further added that the ITC hotels demerger will improve ROCE and cash flows.
ITC posted its fiscal first quarter profit at Rs 5180.12 crore, up 16.1 per cent in comparison to Rs 4462.25 crore during the first quarter of FY23. It posted revenue from operations at Rs 18,639.48 crore, down 6.0 per cent as against Rs 19,831.27 crore during the corresponding quarter of previous year.
“ITC’s Q1FY2024 numbers beat ours as well as the street’s expectation mainly as OPM came in higher than estimates. A better mix and fall in input prices YoY led to 850 bps YoY rise in gross margins to 59.5 per cent and 682 bps YoY improvement in the OPM to 39.5 per cent (beating our expectation of 35.3 per cent). Operating profit grew by 11 per cent YoY to Rs 6,250.1 crore and PAT grew by 17.6 per cent YoY to Rs 4,903 crore. According to the entitlement ratio, shareholders holding 10 shares of ITC will receive 1 share of the demerged hotel business,” said Sharekhan by BNP Paribas.
“ITC’s Q1 print was operationally in line, with EBITDA/APAT growing by 11/18 per cent vs the expectation of 11/16 per cent. The core business performance remains healthy, outperforming other FMCG peers. The recent stock run-up (~44 per cent in LTM) limits further rerating potential. We maintain our estimates and value ITC on a SoTP basis to derive a TP of Rs 450,” said Varun Lohchab from HDFC Securities.
Cigarette and FMCG driving growth
ITC’s FMCG business posted a revenue growth of 16.1 per cent on-year to Rs 5166 crore and the cigarettes business posted Q1 revenue at Rs 7465.27 crore. “Overall gross revenues (ex-wheat exports) grew 10.6 per cent YoY led by continued strong performance in cigarettes (13 per cent YoY, ~9-10 per cent YoY volume growth) and FMCG (+16 per cent YoY). In cigarettes, ITC has highlighted: 1) volume recovery from illicit trade continues on the back of (a) stability in taxes and (b) deterrent actions by enforcement agencies; 2) recent launches gaining traction with enhanced product portfolio mix. Management highlighted that FMCG witnessed strong growth 1) across major branded foods categories and premium soaps, 2) continued strong traction in stationary and incense sticks, 3) across channels and markets driven by ramp up in market coverage,” said Manoj Menon, Head of Research & Consumer Analyst (Staples & Discretionary), ICICI Securities.
ITC’s hotel demerger
ITC, while announcing its fiscal first quarter earnings, had said that it will demerge its hotel business from the rest of the company, separating it from its cigarettes and food businesses. ITC will incorporate the wholly-owned subsidiary ITC Hotels Ltd. “ITC has approved the demerger of the hotels business with a share entitlement ratio of 10:1 with expectation of listing for ITC hotels in ~15 months. The Hotel business will continue to leverage ITC’s institutional strengths, strong brand equity and goodwill,” said Manoj Menon from ICICI Securities.