itc equity research report pdf

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ITC Ltd Tobacco Products | NSE : ITC

• Target : 360.0 (16.88%)
• Target Period : 12 Month

02 Aug 2022

Cigarettes, paperboards, agri volumes driving growth.

ITC is the biggest cigarettes & second largest FMCG company in India with ~78% of market share in cigarettes & presence in staples, biscuits, noodles, snacks, chocolate, dairy products & personal care products. It is also present in paperboard, printing & packaging business, agri & hotels businesses.

• The company has more than 200 manufacturing facilities in India. It has a distribution reach of over 6 million retail outlets across various trade channels and strong 25 brands across various categories

ITC reported robust growth across segments.

• Sales were up 41.4% YoY, with cigarette volumes growing at ~25%
• EBITDA was at Rs 5647 crore, up 41.5% YoY, with margins at 30.8%
• Consequent PAT was at Rs 4169 crore (up 38.4% YoY)

ITC’s share price has underperformed FMCG index with mere 10% return (from Rs 281 in August 2017 to 308 in August 2022)

• We expect cigarette volumes, FMCG business & paperboard industry to continue growth momentum in future
• We maintain our BUY recommendation

We value the stock at Rs 360 on SOTP basis valuing cigarettes business at 16x FY24 earnings & FMCG business at 6x FY24 sales

• Stable taxation on cigarettes is expected to drive volumes, going forward. Moreover, the company has been gaining market share in cigarettes from last one year through new premium products & aggrieve trade promotions
• FMCG business growing at a sustained pace with continuous improvement in margins in last five years. Opportunity size of existing foods portfolio is large. Given agri commodities constitute larger part of raw material, input cost pressures is relatively less for the company
• The demand for paperboard user industry is very high given global disruptions due to energy costs. This along with high pricing would continue the growth momentum in medium term 

We also like Dabur in our FMCG coverage.

• Significant shift in consumption towards healthier, natural & Ayurveda based products & aggressive foray in many big categories would be driving growth for Dabur
• Value the business at 52x FY24 earnings. BUY with a TP of Rs 680

Particulars

Shareholding pattern, price chart, recent events & key risks.

• New products, aggressive trade promotions aiding growth in cigarette business
• Key Risk: (i) Commodity inflation to keep FMCG margins under check (ii) Any abrupt increase in taxes or duties on cigarettes

Research Analyst

Key financial summary, key takeaways from recent quarter.

Q4FY22 Results: Cigarettes volumes, agri exports, paperboard demand conditions & recovery in fmcg discretionary categories boosts growth

• Revenue witnessed growth of 41.4% to Rs 18320.2 crore led by robust growth of 29% in cigarette business, 82.7% growth in agri business, 43.3% growth in paperboard business & 19.5% growth in FMCG business.
• On a three-year CAGR basis, cigarettes, agri, paperboard, FMCG & hotels business saw 6.7%, 27.4%, 14.1%, 13.3% & 12.2% sales growth. Given no major pricing intervention in cigarettes in the last one year, we believe volume growth would have been closer to ~25% with some product mix improvement
• Cigarette volume growth is also aided by deterrent action by enforcement agencies on illicit trade. Also stable tax in last five years helped the industry to regain volumes post pandemic. Our channel check suggests cigarette volume growth at Rs 10/stick price point is robust. Product mix improvement led to realisation improvement of ~4%
•  It launched new products in the category like Classic Connect, Gold Flake lndie Mint, Gold Flake Neo SMART Filter, Capstan Excel, American Club Smash, Gold Flake Kings Mixpod, Wave Boss, Flake Nova and Flake Excel Taste Pro. ITC is driving premiumisation in the cigarette category with innovative new products
• The strong growth in FMCG business was led by recovery in education & stationary business & high growth in discretionary categories like snacks, juices, dairy & incense sticks. With increase in wheat prices, ITC took small price hikes in Aashirwad aata. Though volume growth in aata segment were muted on high base but brand also witnessed premiumisation trend in Q1. Despite high commodity inflation FMCG operating margin contraction was merely 20 bps to 7.7%
• The company launched new products in dairy segment like Litchi Lassi, Arm Doi, High Shelf Life Paneer. It also launched Sunfeast Moms Magic Golden Edition and Sunfeast Moms Magic Butter Fills in premium cookies segment. Other new products include variants of Bingo in snack category
• In FMCG, modern trade channels sales accelerated on the back of improved mobility & store footfalls. E-commerce channels sales has grown 4.2x in last three years and is now contributing 7% of sales. The company has increased the coverage of rural stockist by 2.7x in last three years. Similarly, direct distribution has increased by 1.3x from pre-pandemic levels
• Agri business sales witnessed growth of 82.7% led by high export demand for wheat, leaf tobacco & rice. The company contracted wheat export quantities before export restriction was imposed. However, agri export may taper town from H2FY23 given high base of last year. Segment profit grew by 45.1% & segment margin contracted by 98 bps given high contribution of commodity exports
• The 43.3% growth in paperboard business is led by strong demand from end user industries along with increasing prices of paper & paperboard. The high energy cost in Europe resulted in strong pricing growth in the segment. The company also witnessed high export for Value added paperboard along with realisation growth. Fine paper demand also recovered after opening up of educational institutes. All these factors resulted in 56% growth in segment profits & 220 bps improvement in segment margins to 27%
• Hotels occupancies were above 70% & ARRs witnessed strong double digit growth. Operating margins in hotels business were at 32.5% against 17.5% in Q1FY20. ‘ITC Narmada’, a hotel in Ahmedabad is expected to commissioned soon
• ITC Infotech witnessed 8% sales growth to Rs 751 crore during the quarter with 40% de-growth in operating profit at Rs 119 crore (15.8% margin). Certain costs associated with strategic partner agreement signed with PTC Inc. Higher employee costs & overhead spends were inline with Industry trend. Comparable Operating profit margin at 19.5%
• Gross margins were down 162 bps, mainly due to higher contribution of low margin agri sales during the quarter & high commodity inflation in key raw materials of FMCG business. However, this was somewhat mitigated with high margins in paperboard business. Some softening of commodity inflation was seen at the end of June, which would be reflected in margin uptick in H2FY23
• Operating profit saw a growth of 41.5% to Rs 5647.5 crore with operating margins remaining flat at 30.8%. Net profit witnessed growth of 38.4% to Rs 4169.4 crore

The current quarter of sales growth accounts for full recovery across segments for the company. Moreover, on a three-year CAGR basis, the sales growth is 16.9%, which is much better than many other FMCG companies. We also believe the company has taken multiples initiatives in cigarettes category like new product innovation and aggressive trade promotions. We believe | 10/stick is witnessing very strong volume growth in last few quarters. Further, education & stationary and discretionary category in FMCG has witnessed full recovery with fully operations schools, colleges, restaurants, hotels and movies threatens. Agri business also witnessing strong export demand conditions, which is aiding growth for the company. Paperboard business growth from end user industry & sharp increase in prices globally is also supporting profitability of the company. After many quarters of disruption & lacklustre growth, ITC has witnessed robust growth across segments. We believe the company would be able to continue to grow in high single digit in cigarettes & double digit growth in all the other segments going forward. We remain positive on growth prospects. We maintain our BUY recommendation with a revised target price on stock to Rs 360/share (earlier Rs 310 /share).

Financial Summary

Profit and loss statement ₹ crore, key ratios ₹ crore, balance sheet ₹ crore, cash flow statement ₹ crore, previous reports pdf:, terms & conditions and other disclosures.

ANALYST CERTIFICATION

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