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MOSL: ITC (Neutral)-Muted Cigarette volumes; Other FMCG margin pressures weigh on ITC

ITC: Muted Cigarette volumes; Other FMCG margin pressures weigh on ITC

(ITC IN, Mkt Cap USD38.3b, CMP INR232, TP INR240, 4% Upside, Neutral)

 

• Tapering in-home consumption and sharp commodity cost inflation could affect strong EBIT growth in the Other FMCG segment, preventing the contribution of Cigarettes in overall EBIT to decline much (likely to reduce to ~80% in FY23E which is still within its ten-year range of 80-86%).
• Cigarette volumes for ITC and even other players globally have been on a declining trend, given the increased health consciousness among consumers over the last decade. With the government having recently (Oct'21) set up an expert panel tasked with preparing a comprehensive tax policy proposal for all forms of tobacco from a public health perspective, the overhang of a policy change that may affect cigarette volumes remains on the stock.
• The rumored demerger of ITC Infotech, even at INR200-250b, is only 6-8% of ITC's current market capitalization and is partly factored in the price already. In our opinion, it does not portend demerger of other FMCG or the Hotels business in the near term, nor does it reduce the dependence on its Cigarette EBIT.
• While ITC's efforts on the overall ESG (environmental, social, and corporate governance) front are truly commendable, the concern over its Cigarettes business from an ESG perspective remains in play, as more funds turn ESG-compliant globally, affecting the valuations of global Cigarette companies, including ITC.