ITC Q2 Results Review - Encouraging Performance; Maintain 'Buy': Axis Securities

Axis Securities Report

ITC Ltd.'s revenue grew by 3% YoYto Rs 16,394 crore, mainly due to subdued performance in the agriculture and paperboard businesses. Gross margins stood at 56.9%, up 43 basis points YoY, due to a sequential decline in raw material prices. Ebitda margins were 36.9% (flat), due to higher opex.

Reported profit after tax was Rs 4,927 crore (up 10% YoY). Cigarettes (~80% of Ebit) – The company’s cigarette division continued its strong momentum with sales growth of 10% (volume growth of 4-5%), led by market share gains from illicit trade, targeted market interventions, and new product launches. Over the years, discriminatory and punitive taxation on cigarettes has led the entire legal cigarette industry to grapple with the loss in market share and volumes from illicit trade.

However, stable taxation in recent years has led to a recovery in market share and volumes. We also expect the company’s cigarette margins to increase slightly in the future as realisation per stick improves.

Outlook:

The stock is currently trading at 23 times FY25E earnings per share and a 3-4% dividend yield provides a margin of safety compared to its peers.

While valuations of other players stand elevated, ITC makes a better play in the entire fmcg pack on account of a stable outlook for the cigarette volume growth (led by stable taxation, market share gain from illicit trade along with new product launches), the fmcg business reaching the inflexion point with its Ebit margins inching up further, strong and stable growth witnessed in hotels, and steady and decent performance outlook in paperboard and agribusiness.

Valuation and recommendation:

We estimate the company to post revenue/Ebitda/profit after tax growth of 10%/12%/12% compound annual growth rate over FY23-26E and maintain a 'Buy' rating on the stock with an unchanged target price of Rs 540/share.

We value the company at 27 times June-25 EPS. The target price implies an upside of 20% from the current market price.

Key Risks to our estimates and target price

Increase in competitive intensity in cigarettes, raw material inflation, and the slowdown in the economy impacting Hotels and other cyclical businesses.

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