MOSL: ITC (Neutral)-Cigarette volume decline higher than expected-outlook muted

​ITC: Cigarette volume decline higher than expected; outlook muted

(ITC IN, Mkt Cap USD56.1b, CMP INR269, TP INR280, 3% Upside, Neutral)

• ITC’s 2QFY18 net revenue grew 1.1% YoY (est. of +2.5%) to INR97.6b. EBITDA margin expanded 90bp YoY (est. of +160bp). EBITDA thus grew 3.6% YoY to INR37.6b (est. of +6.6%). Adj. PAT grew 5.6% YoY (est. of +9.5%) to INR26.4b.
• Cigarette volume is likely to have declined ~6% YoY, higher than our expectation of a 2% fall. We reckon the proportion of sub-65mm cigarette sales to have increased further. For cigarette, revenue declined 2.3% YoY, while EBIT grew 2.3% YoY (320bp expansion of EBIT margin on gross sales). Cigarette EBIT growth was the second weakest in 10 quarters, following a 1.7% increase in 3QFY17. Outlook appears tough for the near term.
• ‘FMCG – Others’ sales were up 5.3% YoY to INR28b (est. of +4%), with EBIT profit of INR205m compared to INR33m loss in 2QFY17. The accompanying result press release stated that a) comparable sales growth for ‘FMCG - Others’ was ~10% and b) it gained market share in major FMCG categories, particularly in atta, potato chips, premium cream biscuits and deodorants.
• Hotels, Agri and Paper revenues grew 1.0%, 4.6% and 4.7% YoY, respectively. Margin in the paper business expanded 240bp YoY to 20.9%, the highest in 13 quarters. Hotel business reported a 120bp margin improvement, while agri business witnessed a 280bp EBIT margin contraction.