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MOSL: ITC (Neutral)-In line result; no Cigarette EBIT revival in sight

ITC: In line result; no Cigarette EBIT revival in sight

(ITC IN, Mkt Cap USD39.1b, CMP INR238, TP INR240, 1% Upside, Neutral)

 

• ITC's 2QFY22 result was broadly in line with our estimates. Weakness in the Cigarette and Agri sales were offset by a good performance in Paperboards and Hotels.
• While volume recovery over a weak base continues, neither Cigarette volumes nor EBIT is back to growth levels over 2QFY20 (two years ago).
• Growth in FMCG - Others was only 3% (albeit on a healthy base). Persistent material cost pressures meant that operating margin was flat YoY, and is likely to be flat in 3QFY22 as well.
• Continued sub-par growth in EBIT in the mainstay Cigarettes business and tepid underlying Cigarette volumes act as a deterrent against a valuation re-rating. ITC's valuation of ~15x FY23E appears fair. We maintain our Neutral 

Result in line with our estimates

• Net revenue was up 13.8% YoY to INR127.3b (in line), EBITDA grew 13.7% YoY to INR46.2b (in line), PBT increased by 14.2% YoY to INR48.8b (in line), and adjusted PAT rose 13.7% YoY to INR37b (in line).
• Overall gross margin contracted by 40bp YoY to 57.2% in 2QFY22, while EBITDA margin remained flat YoY at 36.3%.
• Cigarette volumes are likely to have grown by ~9% YoY (est. +12%). The volume decline in the base quarter was 12%. Cigarette sales grew 11.4% YoY to INR48.2b (est. INR50b). EBIT in Cigarettes grew 10.4% YoY to INR35.8b on a weak base (est. 15.5% growth YoY to INR37.5b), but declined by 6.8% v/s 2QFY20 levels. In the base quarter (2QFY21), EBIT had declined by 15.6% YoY to INR32.4b. EBIT margin for the Cigarettes business contracted by 60bp YoY to 74.4%.