Result Analysis- ITC Ltd.

Result Highlight: 

• ITC Revenue rose 24% QoQ and 12.91% YoY to ₹ 14844 crore – in line with the estimates. Other income fall 19.59% YoY to ₹ 468 Crore.

• EBITDA Margin was rose 250bps from 34.34% to 36.96% from last

• Net profit rose 10.09% YoY to ₹3763 crore for the September quarter compared with ₹ 3418 crore in the same quarter last Reported strong operating Cash flow of ₹ 5821 crore in Q2.

• EBITDA for the quarter came in at ₹ 5486 crore grew by 10.09% last year.

• Cigarettes segment sales grew 10.52% y-o-y .cigarettes volume growth is around 9%.

• Hotel Segment raw a sharp rebound as revenue increase 250x in this quarter compared to last year.

• FMCG Segment EBITDA at 403 cr., up 35% sequentially and 82% over Q2 FY20. EBITDA Margins sustained at 10% in spite of unprecedented commodity inflation

• Paperboards, Paper & Packaging Segment delivers strong performance; Segment Revenue up 25% y-o-y ̶ Paperboards volumes at record high.

Management commentary: 

• Management said Shortage in availability of shipping containers/port congestions and inclement weather towards the end of the quarter delayed customer call-offs especially in agri segment

• The project for the state-of-the-art facility to manufacture and export Nicotine & Nicotine derivative products being set up by the Company’s wholly owned subsidiary, ITC IndiVision Limited, is progressing. The facility is being geared to manufacture purest nicotine derivatives conforming to US and EU pharmacopoeia standards.

• With easing of travel restrictions imposed during the second wave, domestic leisure segment and staycations witnessed an uptick during the quarter. Launched two new brands – ‘Storii’ and ‘Mementos’ – to expand footprint across the country through management contracts.

• In cigarette segment Broad-based recovery witnessed across markets during the quarter; certain markets in Kerala and East remain relatively subdued.

• On the FMCG revenue there was a disappointment as street was working with 7-8% revenue growth but it came at 3% which management said is due to higher base last year.

• Management said there was robust growth in VAP segment; strong performance in exports on a high base notwithstanding logistical challenges. There was higher realisations, investments in pulp import substitution, cost-competitive fiber chain, sharper focus on operational efficiency has helped the company.

• After significant disruptions in Q1, Cigarette volumes witnessed smart recovery with exit volumes at near preCovid levels cigarettes volume has seen faster recovery vs. first wave of the pandemic.

  OUTLOOK

ITC Q2FY22 result was mostly inline to the street expectation but the biggest disappointment was the FMCG revenue growth which came in at 3% which was lower than street expectation of 7-8%, Revenue grew 12.91% which was driven by good cigarette and Hotel business, EBITDA margin was flat compared to last year at 37%.and PAT was largely in line with street expectation. Company has manage margin well, as there raw material cost has moved up sharply, which is also expected to remain elevated going forward. In this quarter around 8% of total revenue come from digital market. ITC FMCG revenue was lower than expectation which management said is due to high base as there was stock pileup of hygienic and FMCG product in earlier quarter, while Paperboard Continued to See Strong YoY. IT segment of the company also saw good improvement and PAT margin has improved to 21.2% in first half. We believe margin may come under little pressure due to palm oil prices, crude prices and ocean freight cost, the biggest thing to see going forward is the FMCG volume growth. Government has also set up a panel which is going to give its recommendation on Tobacco Tax which may impact ITC cigarette business which is highest revenue and profit geneatator, ITC trades at at very steep discount to all other FMCG company and has underperform in this current rally but seeing its financial performance and strong free cash flow and very strong balance we believe this stock should perform well going forward.

At the CMP of ₹226, ITC is trading at PE multiple of 16x. Valuing the company at 20x FY23E EPS, we recommend buy on ITC at CMP of for the Target Price of ₹ 265.

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