ITC’s Q1FY18 revenue dip of 1% y-o-y and EBITDA & PAT growth of 6.2% and 7.4% y-o-y, respectively, came in line with our estimates. Amidst GST-related destocking, cigarette and FMCG businesses clocked decent growth.
ITC’s Q1FY18 revenue dip of 1% y-o-y and EBITDA & PAT growth of 6.2% and 7.4% y-o-y, respectively, came in line with our estimates. Amidst GST-related destocking, cigarette and FMCG businesses clocked decent growth. Cigarette volumes rose 1% y-o-y, 3% y-o-y in Q1FY17, improving from flattish in Q4FY17. Similarly, FMCG sales surge at 9.0% y-o-y, 9.5% y-o-y in Q1FY17, was better than 6.5% y-o-y in Q4FY17; we expect the FMCG business to grow in double digits in FY18 aided by entry in new segments. However, net sales growth was marred by ~372bps y-o-y expansion in excise duty—gross sales grew 4.1% y-o-y. Recent revision in GST rates has led to another round of price hikes, ~7-8%, as it has increased ITC’s tax burden by 20%, initially estimated: ~16-17%, which is likely to impact volumes.
Cigarette business clocked 3 quarters’ high gross sales surge of 6.6% y-o-y in Q1FY18 with 81bps y-o-y margin improvement. This was led by price hikes flowing in numbers. Volumes also improved due to rising salience of 64mm in the overall mix (upwards of 30% now). FMCG growth of 9% y-o-y despite destocking was commendable, aided by packaged foods, Aashirvaad, Sunfeast, Yippee!—noodles category size crossed pre- Maggi fiasco level and entry in new categories such as juices and chocolates, personal care and stationery products.
While hotels and paper businesses grew 6.1% and 2.8% y-o-y, respectively, agri business dipped 1.2% y-o-y. Increase in room rentals improved realisation in hotels with 132bps y-o-y margin improvement. While margin in agri business was maintained, paper margin expanded 20bps y-o-y.
With per capita consumption 1/18th of China’s, cigarette opportunity in India remains attractive over the long term. However, the high GST rate will pressurise volumes due to resultant price hikes. We maintain ‘Hold/SP’ and value ITC on SOTP on FY19E to arrive at target price of Rs 304. The stock is currently trading at 26.6x FY19E EPS.