ITC Q122 result update

Source : Jefferies
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The pandemic-related disruption impacted most consumer companies but weighed heavily on ITC which reported a sharp earning decline in FY21. ITC enjoys low base benefit but 1Q performance has been sharply ahead led by cigarettes (& paperboards); FMCG EBIT was also ahead.
Management showed agility during times of disruption and has presented a fairly positive outlook. We raise EPS by 2-4% and view ITC as a high conviction Buy with a price target of Rs275.
1Q performance:

Op. EBITDA grew 51% YoY to Rs40bn, 12% ahead of our estimates. On a 2-yr CAGR, EBITDA still declined 6%, which is understandable in the context of restrictions during the quarter.
1Q performance:

Net earnings grew 29% YoY to Rs30bn, which was 6% ahead (lower beat at net level partially due to falling yields, impacting other income).
Recovery in cigarette:
Net revenues grew 33% YoY which was entirely led by volumes. EBIT grew 37% YoY, 7% ahead - beat was led by higher volumes & margins. On a 2-yr CAGR, EBIT declined 9% and volumes also contracted. Covid impact was higher in markets of south, metros etc.
Cigarette outlook:
There has been steady improvement from mid-Jun'21 with most markets returning to normalcy and the recovery has been faster than the first wave although certain markets of Kerala, Odisha & north-east remain partially impacted.
Management outlook on Cigarette:

Management has also shown agility and has been focusing on expanding cigarette presence in grocery which may add to medium-term potential, in our view.
FMCG EBIT better:
FMCG revenues grew 10%- the modest growth has been due to a high base of last year as categories like staple/foods benefited from pantry loading coupled with disruption in the current quarter; hygiene portfolio bounced-back post normalization in 2HFY21.
FMCG contd
FMCG EBITDA grew 16% YoY while EBIT was up 38% to Rs1.7bn which was 14% ahead. However, there are concerns on the input price front particularly on vegetable oil, packaging etc.
Blockbuster paperboards:
Revenue grew 54% YoY - while low base helped, this was still significantly ahead of our estimates. EBIT margins rose to an all-time high at c.25% which drove EBIT 2.5x YoY to Rs3.9bn.
Paper boards contd

The strong performance was partially led by higher global pulp prices which actually benefited ITC given its investments in the back-end, and we believe this is likely to continue for the next couple of quarters.
Others: Hotels' revenues were impacted although increased multi-fold YoY off a low base. However, business remained in losses due to sub-par revenue trend. Jun-21 trends improve as travel restrictions eased and ITC also ramped-up food takeaway/ home delivery segment.
Other contd ...

Agri revenues & EBIT grew 9-10% led by opportunities in wheat, rice & leaf tobacco.
14 /n
Raise EPS - Buy:
With better-than-expected results along with better commentary, we raise EPS forecasts by 2-4%. We retain our Buy rating with a slightly higher PT at Rs275.
15 / n
ITC 1q FY 22 summary

Op. Ebitda above estimate led by better- than expected performance in cigarette and paperboard business

Break up of expenditure

Op. leverage gains helped YoY margin expansion

17 / n
Cigarette volumes grew c.33% YoY, in our view. This implies a 7% decline on 2-yr Cagr vs. 2% decline seen in 4Q

18 / n
Segment information

Both cigarettes and hotels business saw a QoQ drop in revenue/ Ebit, albeit performed better YoY given lower impact of the second wave

Trend in Cigarette EBIT

Cigarette EBIT grew 37% YoY, which implies a 9% decline on a 2-yr cagr vs. 2% decline in 4QFY21

20 / n
FMCG - Other

FMCG growth moderated on a high base, despite benefit from Sunrise acquisition

21 / n
FMCG - Other - EBIT

Segment EBITDA grew 16%, with Ebitda margin up 40bps YoY. Excluding benefit of Sunrise acquisition, FMCG margins were largely flattish in our view

22 / n

ITC's SoTP valuation yields a fair value of Rs275/share

Cigarette business accounts for 61% of SoTP value, while FMCG accounts for 22%

23 / n
1 year forward PE

ITC trades at 16x 1-year forward consensus EPS; 1 SD below 5-year average

24 / end

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