MOSL : ITC: Cigarette volumes deliver positive surprise, boost margins
ITC: Cigarette volumes deliver positive surprise, boost margins
(ITC IN, Mkt Cap USD52.4b, CMP INR350, TP INR400, 14% Upside, Buy)
- ITC’s sales growth momentum was better than expected across businesses in 2QFY23. Estimated Cigarette volume growth of 21% YoY was a positive surprise and resulted in a three-year volume CAGR of 5.1%. The higher-than- expected contribution from the high-margin Cigarettes business resulted in a 250bp beat on our EBITDA margin estimates, which came in at 36.4%.
- As highlighted in our note as well as our , strong earnings momentum (18% EPS CAGR over FY22-FY24 v/s ~5% in the preceding five years) is being driven by healthy performance from Cigarettes in a stable tax environment, strong recovery in Hotels business profitability, and continued good performance of FMCG-Others. Allied with better capital allocation and continued healthy dividend payouts, the path towards high 20’s/early 30’s RoE is visible. We assign a 22x EPS multiple and roll forward to Sep’24E earnings. Maintain BUY with a TP of INR400.
Sales in line; margin beat on higher Cigarette contribution
- ITC’s 2QFY23 net revenue was up 26.7% YoY to INR161.3b (est. in-line), EBITDA grew 27.1% YoY to INR58.6b (est. INR53.6b), PBT rose 21.7% YoY to INR59.4b (est. INR56.4b), while adj. PAT grew 20.8% YoY to INR44.7b (est. INR42.2b).
- Gross margin contracted 20bp YoY to 57% (est. 53.3%) while EBITDA margin remained flat YoY at 36.4% (est. 33.9%) in 2QFY23.
- Cigarette volumes likely to have increased 21% YoY in 2QFY23 (est. +13%). The volume growth in the base quarter was 9%; however, three-year volume CAGR stood at 5.1%. Net Cigarette sales grew 22.9% YoY to INR59.2b (est. INR54.8b). Net Cigarette EBIT margin expanded 40bp YoY to 74.8%.
- FMCG-Others sales grew 21% YoY to INR48.8b. EBIT grew 17.9% YoY to INR3.2b in 2QFY23.
- Agri business sales grew 44% YoY to INR40b.
- Paperboards grew 25% to INR22.9b.
- Hotels business grew 81.8% to INR5.4b.
- Other income was down 25.1% YoY to INR5.1b.
1HFY23 net sales/EBITDA/adj. PAT growth stood at 34%/33.7%/28.7% YoY, respectively
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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