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MOSL: ITC (Neutral)-Disappointing cigarette EBIT casts cloud over earnings growth

ITC: Disappointing cigarette EBIT casts cloud over earnings growth

(ITC IN, Mkt Cap USD40.5b, CMP INR235, TP INR253, 8% Upside, Neutral)

 

Brief view on results and stock

• While ITC’s 3QFY20 operating performance was in line, the 9-quarter low Cigarette EBIT growth of 5.6% casts a cloud over the pace of earnings for the next two years amidst a tough operating environment. Cigarettes contribute ~85% of the total EBIT.
• Despite cheap valuations of 18.2x FY21/16.7x FY22 EPS, we maintain our Neutral rating, owing to weak earnings prospects and significant overhang of the GST increase (after 30 months since the last increase, thus posing further risks to earnings). 

In-line operating performance; cigarette volume growth likely at ~2.5%

• 3QFY20 net revenues grew 5.1% YoY to INR120.1b (v/s est. 5.6% to INR118.6b), EBITDA grew 6.6% YoY to INR46.1b (v/s est. INR45.7b), PBT growth stood at 7.2% YoY to INR51.7b (v/s est. INR48.7b), while Adj. PAT increased 33.2% YoY to INR42.7b (v/s est. INR39.4b). PAT beat was due to the low tax rate. Other income was up a sharp 17.6% YoY, which was offset by the 24% increase in depreciation. Overall gross margins contracted 20bp to 62.2% while EBITDA margin expanded 60bp YoY to 38.4%.
• 9MFY20 revenue/ EBITDA/ PAT growth stood at 5.4%/ 7.9%/ 27.7% YoY.
• Cigarette volume likely to have grown at ~2.5% (v/s est. 3%) leading to net sales growth for cigarettes of 4.7% YoY. Cigarette EBIT margins expanded 60bp YoY to 70.7%. Cigarette EBIT, thus, grew 5.6% YoY to INR37.6b, (v/s est. INR38.8b).
• FMCG-Others net sales were up 3.5% YoY (up 6.1% on a comparable basis excluding the Lifestyle Retailing Business) to INR33.1b amidst a marked slowdown in the FMCG industry across urban and rural markets. FMCG-Others EBIT improved YoY to INR1b in 3QFY20 (INR767m in 3QFY19). Revenues of Agri Business, Paperboards, Paper & Packaging and Hotels grew 8.8%, 0.8% and 22.2%, respectively.