ITC Q2 Results Review - Topline Beat Offset By Soft Margin Performance: Systematix

Systematix Research Report

ITC Ltd.'s revenues came in above expectations at 2.6% with better-than-expected cigarette volumes, hotel and agribusiness revenue. Ebitda margins were lower than our expectations at 36.5%, up 15 basis points YoY due to inferior segment mix, lower margins in cigarettes and severe margin pressure in the paper business.

Key highlights:

1. Cigarette volume/revenue/Ebit growth of ~6%/10%/8% (5% four-year volume compound annual growth rate) led by sustained volume claw back from illicit trade on the back of deterrent actions by enforcement agencies and relative stability in taxes,

2. fast moving consumer goods grew 8.3% to Rs 52.9bn (two-year CAGR of 14.5%) led by growth in Atta, Spices, Personal Wash and Agarbatti categories, with continued margin expansion of 150 bps,

3. Hotel business continued a strong rebound despite high base, grew 21.2% YoY and Ebit grew 50% YoY (margin up 370 bps YoY) driven by higher revenue per available room and strategic cost management initiatives,

4. Agri business declined only 1.7% and grew 26.4% excluding wheat/rice driven by leaf tobacco and value added products,

5. paper segment revenue declined 9.5% due to low priced Chinese supplies, subdued demand and fall in pulp prices and

6. ITC Infotech posted revenue growth of 13.3% with Ebitda margins of 18% (up 150 bps YoY).

We expect the volume trajectory on cigarettes to sustain with stable margins, while fmcg traction should continue given the distribution ramp-up alongside a continued improvement in margins.

Hotels and agribusiness should continue strong momentum while paper business seems to be bottoming out.

Strong cash generation and a solid dividend yield should continue to provide downside support. The hotels business demerger is a positive and we expect an accelerated re-rating if it is followed with similar actions in fmcg/IT businesses as well.

We build in 8%/9%/11% revenue/Ebitda/profit after tax compound annual growth rate over FY23-25E.

We maintain our 'Buy' rating with a revised target price of Rs 515 (Rs 510 earlier), based on 27 times FY25E earnings, a 10% premium to LPA multiple given visibility of a double-digit earnings CAGR and possible restructuring triggers.

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