PL Stock Report: ITC (ITC IN) - Q2FY24 Result Update – Steady performance, expect back ended returns - Accumulate

ITC (ITC IN) - Amnish Aggarwal - Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: ACCUMULATE | CMP: Rs450 | TP: Rs492

Q2FY24 Result Update – Steady performance, expect back ended returns

Quick Pointers:

♦ Cig volumes up 4.9%, FMCG sales grow 8.3% with margins up 173bps YoY

♦ Hotel outlook remains strong with higher ARR

ITC EBIDTA growth at 3% was below estimates due to sharp decline in Paperboard segment EBIT by ~50% and moderation in cigarette volume growth to 4.9% on a normalized and high base. FMCG EBIDTA margins of 11% (36.8% EBIT growth) and 49.6% EBIT growth in hotels have been positive. We expect cigarette volume growth to moderate to 4-5% range in 2H24. FMCG business is expected to gain from festive season, expected uptick in rural demand and scale economies. We believe Paper and Paperboard business is near bottom and expect QoQ margin improvement in coming quarters. We expect strong growth from Hotels and FMCG to sustain given benign input costs and strong demand outlook for both domestic and foreign travel.

We are largely retaining our estimates and introduce FY26 EPS. we estimate 9.7% EPS CAGR over FY23-26. We believe FMCG and IT services will add significant shareholder value over coming few years. ITC trades at 23.6x Sept FY25 EPS with ROE/ROCE of 32.8/42.3% and ~80%+ dividend payout. We assign SOTP based target price of Rs492 (Rs475 earlier) as we roll forward to Sept25. Valuations limit major downside, expect for any punitive cigarette taxes in future. We expect back ended returns post sharp appreciation over past couple of years. Retain Accumulate.

2Q PAT up 10.3%: Revenues grew by 2.6% YoY to Rs165.5bn. EBITDA grew 3% YoY to Rs60.4bn (PLe: Rs 63.5bn); Margins expanded by 15bps YoY/-298bps QoQ to 36.5% (PLe:38.6%). Adj PAT grew by 10.3% YoY to Rs49.3bn (PLe: Rs49.9bn).

2QFY24 Segment Wise Performance

♦ Cigarette Revenues grew 10.1% YoY to Rs76.6bn; EBIT grew 8% YoY to 47.8bn. Margins contracted 125bps YoY to 62.4%. Cigarettes volume growth of 4.9% (PLe: 6.2%).

♦ FMCG Revenues grew by 8.3% YoY to Rs52.9bn; EBIT grew by 37% YoY to 4.4bn. Margins expanded by 173bps YoY to 8.3%.

♦ Hotels Revenues grew by 21.2% YoY to Rs6.5bn; EBIT grew by 50% YoY to 1.3bn. Margins expanded by 370bps YoY to 19.4%.

♦ Agri Revenues declined by 1.7% YoY to Rs39.3bn; EBIT grew by 3% YoY to 3.6bn. Margins expanded by 44bps YoY to 9.1%.

♦ Paperboard & Paper Revenues declined by 9.5% YoY to Rs20.7bn; EBIT declined by 50% YoY to 3.2bn. Margins contracted by 1227bps YoY to 15.3%.

♦ ITC Infotech Revenues grew 13.3% YoY to Rs9.3bn; EBITDA grew by 23.7% YoY to 1.7bn. Margins expanded by 151bps YoY to 18.0%.

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