ITC's Q1FY20 results (Downgrade to Neutral) - Muted cigarette volume growth…
Q1FY20 result highlights
- ITC’s net revenues increased by 6% yoy to Rs115bn (est: Rs119bn). EBITDA grew 8.7% yoy at Rs45.6bn (est: Rs45.6bn). PAT increased by 12.6% yoy to Rs31.7bn (Rs31.3bn).
- Cigarette revenues grew by 6% yoy (est: +6.5%). We estimate Cigarette volumes increased by ~3% yoy (est: 3%, consensus: 3-6%). Cigarette EBIT grew by 8.2% yoy (est: +8% yoy) with margin expansion of 140bps yoy aided by improved price/mix (higher contribution from in-house capsule).
- FMCG sales increased by 6.6% yoy (adj. for sales of ‘John Players’ brand in Q4FY19, retail business sales growth would be ~9% which is a good print). Despite higher ad-spends, EBITDA increased by 41% yoy to Rs1.8bn with a margin expansion of 140bps yoy to 5.9%.
- Hotels & Agri revenues grew by 15% yoy each while Paper business revenues were up 13% yoy for the quarter. Agri business EBIT increased by 4% yoy with a margin contraction of 60bps yoy. Paper EBIT was up 11.5% yoy with margin contraction of 20bps yoy.
- Hotels EBIT declined by 21% yoy with margin contraction of 120bp yoy impacted by higher ad-spends and full quarter depreciation impact of 2 properties launched in Q4. EBITDA growth was 18% yoy.
Key positives: Healthy EBIT margin expansion in Cigarette
Key negatives: Weak cigarette volume.
Impact on financials: Cut FY20E/21E EPS by 1.9%/2.5%.
Valuations & view
ITC’s results were in line with our expectations with 3% yoy volume growth on a base of 2%. From Q2FY20E onwards base becomes further unfavourable (9MFY19 cigarette volume growth at ~7%) and if Q1 volume growth is anything to go by, delivering mid-single digit volume growth would be challenging. As a result, Cigarette EBIT growth is falling short of double digit mark despite improvement in prices/mix. While regulatory environment is stable but the likelihood of punitive taxation action increases with every passing day. Revenue growth and profitability improvement in the FMCG business is on track but not enough to materially alter the earnings growth profile of 10% CAGR over FY19-21E. Despite cheap valuations (21x FY21E EPS), we downgrade ITC to a Neutral given lack of positive triggers, subpar than peers earnings growth and increasing risk of incremental taxes on Cigarettes.
ITC is a diversified manufacturing and marketing company which is based in India. Co. maintains an operating presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG products. While Co. is an outstanding market leader in its traditional businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports, it is rapidly gaining market share even in its nascent businesses of Packaged Foods & Confectionery, Branded Apparel, Personal Care and Stationery.
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