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ITC's Q4FY18 results (Outperformer) - Cigarette volume trajectory gradually improving

Q4FY18 result highlights

• ITC 4QFY18 reported revenues stood at Rs108bn (est: Rs116bn). EBITDA grew 6.9% yoy at Rs41bn(est: Rs43bn). PAT increased by 10% yoy to Rs29.3bn (Rs29.5bn).
• Comparable Cigarette revenues were up 6% yoy with a volume decline of 3%. Cigarette EBIT grew by 7.6% yoy (est: 10.3% yoy).
• Comparable FMCG revenues increased 10% yoy led by packaged food business, personal care and stationary products business. Hotels revenues increased by 5.6% yoy. Agri and paper division sales declined by 6% and 5% yoy
• Other income increased by 29% yoy, depreciation was up 26% yoy, tax rate was lower by 170bps yoy, resulting in PAT growth of 10% yoy.

Key positives: Lower rate of decline in Cigarette volume compared to 3QFY18

Key negatives: Lower Cigarette EBIT growth, weakness in Hotels, Agri & Paper division

Impact on financials: We have cut our FY19/20E earnings estimates by 3% each

Valuations & view

ITC 4QFY18 results were largely in line with expectations. The pace of decline in cigarette volume continues to decelerate sequentially which is positive. Moreover, with the status quo on tax rates in Union budget and recent GST meetings, we expect gradual recovery in cigarette volumes and commensurate uptick in EBIT growth for the company. We are factoring a 3% cigarette volume growth in FY19 and EBIT growth of 10%/11 in FY19/20E. This with the help of recovering growth and profitability in other categories, we expect a 12% EPS CAGR over FY18-20E. With the stock trading at 25xFY20E earnings, it is at a 35%+ discount to our consumer coverage universe. We believe risk reward is favourable; maintain Outperformer.