ITC’s valuation is inexpensive at ~24x FY25E EPS given the double-digit earnings CAGR: Nirmal Bang

In-line sales; margins surprise positively

Key Points

 ITC reported in-line sales and gross profit for 1QFY24 but lower-than expected other expenses led to a beat on EBITDA and PAT, with EBITDA margin coming in at 39.5% – the third highest for any quarter since 2QFY05.

 Cigarette volume growth likely came in at ~8% YoY for 1QFY24 (4-year CAGR of ~3%), slightly lower than our expectation of 9%.

 We believe that earnings CAGR during FY23-FY25E is likely to be ~12%. Riding on the back of EPS CAGR of ~11% over the preceding four years, ITC’s net profit growth does seem to have turned the corner after the struggles of the past. We view the value unlocking from the Hotel business demerger as a welcome move, especially if it is eventually followed by the demerger of the Other FMCG and IT Services businesses as well. If the same fructifies, re-rating will be sharper going forward. Maintain BUY.

1QFY24 performance update: Standalone topline (net of excise duty) declined by 8.5% YoY to Rs158.3bn (vs est. of Rs155.6bn). Overall gross margin expanded by 850bps YoY to 59.5% (up 90bps QoQ). EBITDA margin expanded by 680bps YoY to 39.5% (vs est. 38.5%). While absolute EBITDA was up 10.7% YoY at Rs62.5bn (vs est. of Rs59.9bn), Adjusted PAT (APAT) grew by 17.6% YoY to Rs49bn (vs est. of Rs46.5bn).

1QFY24 segmental update: Reported Cigarette business revenue grew by 13% YoY to Rs74.7bn (vs est. of Rs73bn). We believe that Cigarette business volume grew by ~8% YoY (vs est. of ~9%), implying 4-year CAGR of ~3%. Cigarette business EBIT grew by 11.2% YoY with reported EBIT margin declining by 100bps YoY to 62.4% (down 140bps QoQ). Adjusted for Excise/NCCD however Cigarette net sales grew by 10.9% with flat segmental margins on a YoY basis. FMCG-Others revenue grew by 16.1% YoY to Rs51.7bn (vs est. of Rs49.4bn). Growth in this segment was driven by Staples, Biscuits, Noodles, Beverages, Dairy, Agarbatti and Premium Soaps. Notebook sales also continued to witness strong growth. Segment EBITDA margin stood at 11% (up 320bps YoY). Agri Business revenue declined by ~23.7% YoY to Rs57bn (up ~31% YoY, ex-wheat exports). Agri segment EBIT margin expanded by 240bps YoY to 6.2%. PPP revenue declined by 6.5% YoY to Rs21.2bn due to weak demand conditions in domestic as well as export markets, sharp decline in global pulp prices and a high base. PPP segment EBIT margin contracted by 480bps YoY to 22.3%. Hotels business revenue increased by 8.1% YoY to Rs6bn. Hotels segment EBIT margin stood at 21.9%, up 170bps YoY.

Hotels business

De-merger: (1) The Board has, subject to necessary approvals, considered and approved demerger of Hotels Business. The Company thereby had incorporated a new wholly owned subsidiary in the name of ‘ITC Hotels Limited’ on 28th July, 2023. (2) For every 10 shares held in ITC (De-merged company), the shareholders will be given 1 share in ITC Hotels (Resulting company). (3) Indicative timeline for listing of ITC Hotels is ~15 months. (4) ITC also acquired 45.36% stake in International Travel House Limited and 25% stake (from Russell Credit Limited – Wholly owned subsidiary of ITC) in Maharaja Heritage Resorts Limited.

View and valuation: Changes to our model have led to 7.5%/3% reduction in FY24E/FY25E EPS as earlier topline forecasts were aggressive for FY24. Nevertheless, earnings growth is likely to be healthy at ~12% CAGR over FY23-FY25E, slightly higher than the earnings CAGR of ~11% in the preceding four years.

Our forecasts do not build in demerger and eventual listing of the Hotels business (likely in 15 months) as we await regulatory approvals and further clarity.

Valuation is inexpensive at ~24x FY25E EPS given the double-digit earnings CAGR over FY23-FY25E, healthy return ratios of 30%+ and a dividend yield of 3.5-4%. After extremely punitive cigarette excise/GST regime until FY18, indirect tax increases have been relatively benign in recent years, thus boosting Cigarette volume and Cigarette EBIT growth. Other businesses like Other-FMCG and Hotels have also started reporting strong profitability improvement in recent years, further aiding pace of earnings growth. We maintain BUY on ITC with a TP of Rs520, valued at 27x June’25E EPS (25x March’25E EPS earlier).