Firm performance

ITC Rating – Buy: Margins Distinguish Business Performance

At a time when most peers are witnessing headwinds on margins, every ITC segment saw flat to expanding margins in the fourth quarter, with smart gains in cigarettes and consumer staples. Cigarette. volume growth at 9% is impressive with double-digit Ebit growth, broadly in line. >20% EBITDA growth is a key positive in FMCG. Dividend payout improves to around 95% while capital expenditure is nearly flat year-over-year, pushing RoE to a 7-year high of 25%. ITC stands out given the high visibility of its margins and we retain Buy.

Fourth Quarter Online: ITC’s fourth quarter standalone Ebitda grew 17% year-on-year to Rs 52.2 billion, in line with our estimates. Growth was driven by the cigarette business, which recorded Ebit growth of 12% (online). The FMCG activity surprised positively, both in terms of turnover and margin. Boxes also performed better than expected, although this was offset by a shortfall in hospitality (3rd wave impact) and agribusiness. EPS growth was slightly lower (+12% year-on-year) due to lower other financial products.

Cigarette recovery: Net cigarette revenue was up 10% year-on-year, with volumes up around 9%, we estimate. Management highlighted the continuation of the broad recovery, with minimal disruption due to the third wave of Covid. Volumes were above the pre-Covid level for the second consecutive quarter.

FMCG outperforms: FMCG revenue grew 12% YoY (vs. 9% in Q3), better than estimates. Growth was driven by discretionary/out-of-home categories as mobility improves. Staples and ready meals also resisted, while the hygiene portfolio experienced volatility. The reopening of schools/colleges contributed to the recovery of the education and stationery portfolio, which benefited from better margins. FMCG profitability also surprised positively, with EBITDA margin up 75 basis points year-over-year to 9%, despite inflationary headwinds.

FY22: FY22 was a year of recovery for ITC, despite the hiccups of the second wave of Covid. Ebitda grew 22% YoY (2-year CAGR: 3%), driven by cigarette Ebit growth of 17% (2-year: flat), 11% growth in Ebit from FMCG, lower losses in hotels and a 40% increase in Ebit from agriculture + cartons. EPS growth was weaker (+16%), due to lower other income.

Higher dividend, lower capex: ITC announced a final dividend of Rs 6.5, bringing the dividend for the full year to Rs 11.5 (>4% yield), up 7% year-on-year. Capital expenditure was limited to 17 billion rupees, broadly similar to FY21. FCF conversion was also healthy at >80% of pre-exceptional PAT.

Hold Buy: We are largely holding onto our FY23/24e EPS estimates. As its FMCG counterparts struggle with slowing growth and RM pressures, ITC is seeing a recovery in earnings, with good momentum across all verticals and high margin visibility. Higher dividend payouts and lower capital expenditures are also encouraging. We retain Buy with an unchanged PT of Rs 305.