ITC: Strong growth; 15% CAGR forecast for the next two years

ITC reported strong strong cigarette volume growth of approximately 12%, slightly below the expected 13%. However, the 3-year/4-year average volume growth of 9.3%/4.3% indicates a strong demand momentum. Additionally, there were no significant increases in cigarette GST or national calamities duty in the recent budget, which bodes well for future volume growth. Unlike other companies in the staples sector, ITC has consistently delivered impressive performance in its other FMCG business, with a revenue growth of around 19% and margin improvement despite higher raw material costs. The Hotels segment has also shown robust performance. Compared to its peers, ITC has better earnings visibility. Given these factors, it is recommended to maintain a ‘BUY’ stance on ITC.

In-line operating performance; Cigarette EBIT up 14%

ITC’s net revenue for the fourth quarter of FY23 increased by 5.6% y-o-y to Rs 164.0 bn, slightly surpassing the estimated Rs 160.5 bn. Ebitda grew by 18.9% y-o-y to Rs 62.1 bn, in line with the estimated Rs 62.1 bn. Profit before tax (PBT) rose by 19.8% y-o-y to Rs 65.2 bn, exceeding the estimated Rs 64.2 bn. Adjusted profit after tax (PAT) experienced a growth of 19.6% y-o-y to Rs 50.1 bn, surpassing the estimated Rs 47.3 bn. Furthermore, the gross margin expanded by approximately 550 basis points (bp) y-o-y to 58.6%, higher than the estimated 57.8%.

Also read: Algo Trading: The great equalizer for retail investors

Cigarette volume is likely to have increased 12% y-o-y in 4QFY23 (est. +13%). Net cigarette sales grew 12.6% y-o-y to Rs 62.5 bn (est. Rs 63.0 bn). Net cigarette Ebit margin expanded 90bp y-o-y to 75.1%.

FMCG-Others sales grew 19.4% y-o-y to Rs 49.4 bn. EBIT more than doubled y-o-y to Rs 5 bn in Q4. Agri business sales declined 18% y-o-y to Rs 35.8 bn. Paperboards sales were flat y-o-y at Rs 22.2bn.

Also read: Who finances India’s public debt: key policy implications

Valuation and view

There are no material changes to our estimates. ITC posted a healthy 24% EPS growth in FY23 and we expect an EPS CAGR of 15% over the next two years. ITC’s earnings outlook is better compared to other large-cap staples players in FY24 and FY25. At a time when uncertainty looms over the industry due to high inflation, unpredictable monsoons and continued weak rural sales, ITC’s earnings performance in the last couple of years has shined like a beacon. The stock has done exceptionally well since our detailed upgrade note in Jun’22 with 60% appreciation, while consumer peers, both staples and recently, discretionaries have struggled. ITC’s dividend yield is healthy at 3.5-4% despite the stock price appreciation. The key challenges for ITC—an extremely punitive tax regime of the past, Covid-related disruption and commodity cost inflation – now seem to be receding. We maintain BUY rating with a TP of Rs 485.