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 fronts
Revenues 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.
Segmental— healthy growth across segments
Cigarette net revenues/Ebit grew 23.3%/23.6% y-o-y (3-yr Ebit CAGR at ~4.8%), 3-4% ahead of expectations. We estimate 21% y-o-y growth in volumes. A stable tax regime and actions against illicit trade aided volume growth. FMCG revenues grew 21% y-o-y, 8.1% above our estimate. FMCG Ebitmargin was flat y-o-y at 6.6%, impressive in the context of significant RM inflation. ITC’s FMCG Ebit at Rs 3.2 bn was 39% ahead of our estimate. Key highlights: (i) robust growth in staples and convenience foods, driven by biscuits, atta and noodles, (ii) strong performance by discretionary/out-of-home categories, such as snacks, confectionery, agarbattis and fragrances, (iii) encouraging trends in Fiama and Vivel range of personal wash products, and (iv) strong traction in education and stationery products business. Agri business’ revenue/ Ebit grew 44%/16.6% y-o-y, led by wheat, rice, and leaf tobacco exports. The hotels segment’s revenues grew 81.8% y-o-y to Rs 5.36 bn and it registered Ebit of Rs 840 mn (KIE: Rs 816 mn). Paperboards and packaging revenues/Ebit grew 25%/54% y-o-y, aided by demand revival across end-user segments; the division recorded yet another decadal-high Ebit margin (27.5%, up 50 bps q-o-q).
We raise FY2023-24 EPS estimates by 5-6%, roll over and revise FV to Rs 380; ADD
We 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.
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.