ITC's Q2FY19 results (Outperformer) - Steady quarter... one offs impact cigarette growth trajectory

Q2FY19 result highlights

• ITC’s net revenues increased by 14.7% yoy to Rs110.9bn (est: Rs106bn). EBITDA grew 11.8% yoy at Rs42bn(est: Rs42bn). PAT increased by 12% yoy to Rs29.5bn (Rs29.5bn).
• Comparable cigarette revenues grew by 10% yoy. We estimate Cigarette volumes increased by ~5.5% yoy. Cigarette EBIT grew by 8.7% yoy (est: 10.1% yoy) impacted by one off cost related to kerala floods & change in packaging for new graphic health warnings.
• FMCG sales increased by 13% yoy led by healthy growth in packaged food business (Staples, Snacks, Biscuits), personal care and stationary products. Segment EBITDA increased by 77% yoy to Rs1.6bn with a margin expansion of 180bps yoy to 5.0%.
• Hotels & Agri revenues increased by 21% and 13% yoy respectively while Paper business revenues were up 9% yoy for the quarter. Agri business EBIT declined by 8% with a margin contraction of 240bps yoy. Paper EBIT was up 13% yoy with margin expansion of 90bps.

Key positives: Healthy cigarette volume growth

Key negatives: Lower than estimated growth in cigarette& Agri EBIT

Impact on financials: Our earnings estimate remain largely unchanged

Valuations & view

ITC 2QFY19 results were a mixed bag with Cigarette business reporting positive volume growth for second consecutive quarter, however, EBIT growth was below estimate impacted by certain one off costs. With regulatory regime remaining stable, benefit of favorable base and no aggressive price hikes, volume growth trajectory should continue to remain healthy and leverage benefit of the same should lead to double digit EBIT growth in coming quarters. We are factoring a 4% volume and 11% yoy EBIT CAGR over FY19-21E for Cigarette division. Moreover, healthy growth in revenues as well as continued improvement in profitability for FMCG business & other divisions would drive overall earnings growth (14% CAGR over FY19-21E). With the stock trading at 25x/22x FY20/21E earnings, it is at a 35-40% discount to the average of the FMCG coverage universe. We believe risk reward is favourable; Maintain Outperformer.