Q1FY24 Review: ITC: Strong performance

16 Aug 2023 , 11:18 AM

ITC reported Q1FY24 results ahead of analysts of IIFL Capital Services expectations. While the overall sales declined 6% and missed their estimates on account of lower Paperboard and Agri sales, Ebitda / PAT growth at 10%/16% were in line with / ahead of their estimates. Cigarette volumes grew 8% — in-line — with a further 150bps contributed by pricing and mix each. For Cigarettes, Ebit margins were flattish YoY. With the chances of a tax hike being low until July next year, combined with reasonable valuations, analysts of IIFL Capital Services believe that ITC stock can deliver good returns. Maintain BUY; TP Rs500. 

Cigarette business performs well: 

Cigarette business performed well, with volume growing at 8% YoY. Net sales grew at 11%, with a 300bps difference being contributed equally by the price and mix, per analysts of IIFL Capital Services estimate. Relative price stability, combined with intelligent price laddering and innovative products have helped consumers to uptrade. At 59%, Ebit margins were flattish YoY. While the base gets a little more unfavourable in H2 of the year, analysts of IIFL Capital Services expect mid-single-digit volume and high-single-digit sales growth in the Cigarette business for FY24. 

FMCG margins surprise: 

For the FMCG business, sales grew at 16% and Ebit margin expanded 375bps to 8.4%, on account of higher margin in the Flour business as well as operating leverage. Lower pulp prices resulted in lower realisations for the Paperboard business; this, combined with lower Agri sales that is quite volatile quarterly, resulted in an overall miss in the top line. However, higher Other income (higher yields) in addition to the beat in FMCG margins, resulted in a beat on analysts of IIFL Capital Services PAT estimates. 

Maintain BUY: 

ITC trades at 24x FY25 — quite reasonable in light of low regulatory risk till July 2024 and robust performance in all its businesses. Analysts of IIFL Capital Services estimate 10% EPS growth for FY24. They value ITC on SOTP basis at Rs500 per share. Consistent quarterly growth, combined with high cash-flow conversion post the hotels demerger, should support the stock performance.