ITC rating – Buy: Recovery process was sustained

ITC witnessed a sequential improvement on cigarette volume in Q4FY21 with c.7% y-o-y growth (in line with consensus; below JEFe). FMCG continued to witness strong growth rates along with margin improvement; hotels was expectedly weak while agri & paperboards’ Ebit was ahead. Ongoing Covid-19 induced restrictions continue to cloud near-term outlook particularly on cigarette volumes although we expect a recovery during H2FY22. We cut FY22 EPS by c.4%; BUY.

Q4 show: Op. Ebitda grew 7% y-o-y to Rs 44.7 bn, 4% below our estimate although largely in line with consensus. On a 2-yr CAGR, Ebitda fell 1%. Pre-ex earnings grew 8% y-o-y to Rs 37.5 bn, which was 4% below.

Cigarette volume miss: Net revenues grew 7% y-o-y, after declining for four consecutive quarters, aided by strong recovery in metros and large towns. Cigarette volumes were up 7-8% with Ebit growing 8% y-o-y, 5% below estimates. On a 2-year CAGR, both volumes and Ebit declined 2%. Volumes recovered back to near pre-Covid levels towards end-FY21; however, second Covid wave has brought up challenges due to constraints in no. of operating outlets and limited hours of operations.

FMCG growth strong: FMCG revenue grew at 16% y-o-y, albeit includes consolidation of Sunrise Foods. Adjusted for Sunrise, stationery & lifestyle business, revenue growth stood at 16% (vs. 11% in Q3). FMCG Ebitda margin expanded 30bps y-o-y to 8.3% (down 90bps q-o-q). Adjusted for Sunrise consolidation, stationery & lifestyle business, Ebitda margin expanded 115bps y-o-y with segment Ebitda up 19%.

Hotels: Hotels revenue continued to recover, up 22% q-o-q. On a y-o-y basis, revenue declined 38%.

Agri: Agri revenues grew strongly, up 79% y-o-y. Ebit margin declined 90bps y-o-y, with Ebit up 54% y-o-y.

Paperboards: Revenue grew 14% y-o-y (vs. 5% decline in Q3). Segment Ebit grew 13% y-o-y with margin flattish at 19.5%.

FY21 performance: ITC saw a 9% EPS decline in FY21, with cigarette Ebit declining 14% and an over Rs 5 bn+ Ebit loss in hotels. FMCG business however did well, with revenue growth of 15% and Ebitda up 44% (34%, ex-Sunrise).

Dividend: ITC declared a Rs 5.75 final dividend, after an interim dividend of Rs 5 declared in Q3. At Rs 10.75, payout stood at a healthy 102%.

Cut EPS: Even as Q4 saw a sustained recovery, second Covid wave creates near-term uncertainty on cigarette volume recovery. We accordingly cut our FY22 EPS estimate by 4% (minor change in FY23). Maintain Buy with unchanged PT of Rs 270.