ITC Q2 results a mixed bag. Here are hits & misses

The September quarter results by FMCG giant ITC Ltd were a mixed bag, as bottom line growth came in ahead of analyst estimates but Cigarette volume growth of 4 per cent and top line growth of 3 per cent disappointed a bit. Weakness in paper business was in line with analyst projections.

The Kolkata-based tobacco-to-hotels conglomerate reported a 10 per cent rise in profit at Rs 4,927 crore for the September quarter compared with Rs 4,466 crore in the year-ago quarter. Revenue was up 3 per cent at Rs 17,705 crore compared with Rs 17,160 crore YoY.

Emkay Global said the top line growth of 3 per cent was below its estimates. It said non-cigarettes operations had a muted show, affected by weakness in the paper business.

"We see near-term stress from margin pressure in cigarettes and weakness in the paper business. Adjusted for this, we continue to see a firm long-term outlook for ITC. Post H1FY24 results, we effect the following changes: cut cigarettes earnings by 1 per cent, factor in continued restriction in wheat and rice exports for the agri business and 15 per cent cut in Ebitda for the paper business for FY24," the brokerage said while reducing its target on the stock to Rs 525 from Rs 535 earlier.

Among the hits, Nuvama Institutional Equities said ITC posted decent growth across most segments. It noted that the hotels business turned in its best-ever Q2 with segment revenue up 21 per cent, recording an Ebitda margin of 30.7 per cent (up 170 bps YoY). FMCG – Others revenue, it said, grew 8.3 per cent YoY led by strong growth in atta, spices, personal wash, agarbatti, notebooks and pens.

"FMCG –Others Ebitda margins expanded 150 bps YoY to 11 per cent driven by premiumisation, supply chain agility, judicious pricing actions, digital initiatives and strategic cost management. The hotel business currently has a healthy pipeline of management contract across its key brands," it said.

What this brokerage did not like was the increasing competitive intensity from regional players in biscuits, snacks, noodles, popular soaps. This is in the backdrop of commodity price deflationary conditions.

"There was a sequential uptick in prices of certain commodities such as wheat, maida, sugar, potato. Occupancy for hotel business remained flattish YoY mainly due to renovations & relatively fewer wedding

dates. The paperboards, paper and packaging segment declined 9.5 per cent YoY on account of low priced Chinese supplies in global markets, sharp reduction in global pulp prices, relatively subdued domestic demand and high base effect. The agri business revenue declined by 1.7 per cent YoY on back of stock limits on wheat, ban on non-basmati rice exports and export duty on parboiled rice, thus limiting the business opportunities for ITC," it said.

ITC valuations 

Nirmal Bang Institutional Equities said ITC valuation is inexpensive at 24 times FY25 EPS, given the likely double-digit earnings CAGR over FY23-FY25, healthy return ratios of 30 per cent-plus and a dividend yield of 3.5-4 per cent.

"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," it said while suggesting a target price of Rs 525 on the stock.