ITC rating: Hold — Covid-19 hit volumes in core business

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Published: June 30, 2020 3:30 AM

FMCG segment showed resilience in quarter; with ESG gaining salience, more is needed for a re-rating; ‘Hold’ maintained

Ebitda margin (up 108bps y-o-y) of the FMCG business expanded for eighth consecutive quarter. Ebitda margin (up 108bps y-o-y) of the FMCG business expanded for eighth consecutive quarter.

ITC’s Q4FY20 net revenue/Ebitda dip of 6.3%/8.9% y-o-y came in line, while PAT growth of 8.7% y-o-y surpassed estimate. Steep tax hike and COVID-19-induced lockdown in March end led to cigarette volume falling 9-10% y-o-y (base of 7.5% y-o-y). Lockdown coupled with subdued demand especially in education and stationery category led to dip in FMCG revenue growth to 5% y-o-y (adjusted for retail business), which was otherwise on track to clock double-digit growth.

Ebitda margin (up 108bps y-o-y) of the FMCG business expanded for eighth consecutive quarter. Maintain Hold given that ESG-led investing is taking on a more significant role and overhang of potential tax tweaks via the Union budget & GST meetings.

Lockdown mars cigarette volume; FMCG business resilient
Steep tax hike and COVID-19-related lockdown led to cigarette volume falling 9-10% y-o-y on a base of 7.5% y-o-y. Lack of operating leverage and calibrated approach to pass on tax hikes led to cigarette’s Ebit margin plunging 396bps y-o-y. Going forward, we expect cigarette volume to recover to pre-COVID-19 level on account of pent-up demand, channel filling and lack of availability of illicit cigarettes.

FMCG business did relatively well considering the environment, clocking growth of 5% y-o-y on comparable basis. Health & Hygiene along with foods portfolio should help ITC’s FMCG portfolio to continue to do well in Q1FY21 as well.

Other businesses: Subdued showing
The hotels business was severely dented by COVID-19-triggered lockdowns, clocking revenue dip of 8.6% y-o-y. Considering the situation, we expect this business to continue to remain impacted. Agri and paper revenues were impacted as well — down 10.2% and 5.1% y-o-y, respectively. The education and stationery products business lost the peak month of March due to closure of educational institutions.

Outlook: Re-rating demands more
While the cigarette opportunity in India remains attractive given per capita consumption at 1/18th of China’s, investing modalities have changed with ESG assuming a more significant role. We maintain ‘HOLD/SU’ with a TP of Rs 220. The stock is trading at 14.6x FY22e EPS.

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