Maintain ‘Neutral’ on ITC with target price of Rs 278

EBITDA rose 10.1% y-o-y to Rs 39 billion, while adjusted PAT increased 6.5% y-o-y to Rs 28.2 billion. Cigarette volume decline is likely to have been 2%. Calculated cigarette revenue grew 14% y-o-y, while cigarette EBIT increased 8% (410bp contraction in margin). There has been no price increase over the last three-four months, unlike the previous years, when ITC used to increase prices ahead of the budget. FMCG – Others’ sales were up 12.2% y-o-y to Rs 28.7 billion, with EBIT profit of Rs 470 million v/s Rs 197 million loss in 3QFY17, led by enhanced scale, mix and cost efficiencies. Accompanying result press release also stated that a) comparable sales growth for ‘FMCG – Others’ was 16% and b) it gained market share in major FMCG categories, particularly in atta, potato chips, premium cream biscuits, noodles and deodorants. Margin in the Paper business shrunk 80 bp y-o-y- to 21%, while Agri business witnessed 110bp EBIT margin expansion to 15.2%.

There is no indication that cigarette business volumes are likely to recover anytime soon, which keeps overall earnings growth prospects unclear. EPS growth at barely double-digits y-o-y is likely to be far lower than peers. Valuations of 26.9x FY19E EPS/23.9x FY20E are fair for a business that continues to grow at slow pace and faces huge regulatory overhang. While eventual diversification away from cigarettes (86% of total EBIT in FY17) to other businesses is possible, as of now, the fate of the business is contingent on regulations governing the cigarettes business. We maintain Neutral with a TP of Rs 278 (25x Dec’19E EPS, a 10% discount to three-year average).

ITC Limited