ITC Q2 results: Cigarette volumes aid growth

Revenue rises: ITC’s total revenues increased 11.1% on-year to Rs 13,356 crore in Jul- Sep 21 period, beating street estimates. Analysts were earlier expecting a revenue of about Rs 13,000 crore. The cigarette segment which is the maximum contributor in revenue reported a 10.1% YoY rise in topline. 

Profit beats estimates: ITC’s net profit jumped 14% YoY to Rs 3,697.18 crore in the quarter ended September-21. Analysts had earlier anticipated a net profit of about Rs 3,500 crore. ITC noted that the quarter witnessed broad-based recovery in sales across markets and channels. Reduction in the intensity of the pandemic along with a pick-up in the pace of vaccination led to improvement in the demand environment and consumer sentiment during the quarter, aiding the bottomline. 

Margins stable: Operating profit rose 14% on-quarter to Rs 5,017 crore. Operating margin stood at 33.8% versus 33.5% in the previous quarter, despite headwinds of commodity inflation.

ITC results: Segment-wise performance

FMCG - Others

The FMCG-others segment saw a 2.9% YoY rise in revenues, even as the profit before tax fell 2.5% on-year. As compared to the previous quarter, there has been a 8% rise in revenue. ITC noted that there has been a sharp rebound in ‘Out-of-Home’ consumption on the back of improved mobility even as ‘at-home’ consumption moderates.  Discretionary/‘Out-of-Home’ portfolio posts sharp recovery both on sequential and y-o-y basis. Hygiene portfolio continues to witness marked demand volatility; moderates sequentially in line with lower intensity of the pandemic; remains significantly above pre-pandemic levels. Segment EBITDA rose 35% QoQ to 403 cr. EBITDA margins sustained at 10% in spite of unprecedented commodity inflation.

Cigarette: Mainstay business

ITC saw a smart recovery in the cigarette business led by fast recovery across states. There has been a faster recovery in volumes versus the first wave, the exit volumes have reached near pre-Covid levels. However, stricter norms on tobacco can remain a key overhang. Recently, the government has said to form a panel to suggest raising taxation on tobacco. Segment EBITDA has jumped 82% over Q2 FY20. Further, FY22 Margin sustained at 10%. Notably, the Cigarette business contributed less than 40% of overall revenues, by nearly 80% to Profit Before tax. 

Hotel

There has been a smart sequential recovery in Hotels Business. The revenue is back to Q4 FY21 levels while the EBITDA at 17 cr. (positive swing of 134 cr. over same period last year). With easing of travel restrictions imposed during the second wave, domestic leisure segment and staycations witnessed an uptick during the quarter. Business travel continues to gather momentum. ITC said that it saw a strong recovery in Occupancy levels. ARRs improve on sequential and y-o-y basis, but remain below pre-Covid levels. Revenue growth driven through sharply targeted packages catering to emerging trends and consumer needs along with focused communication campaigns. However, the business has still reported a loss of Rs 48 crore. 

Agri-business

This segment revenue fell 7% on-year, even as the profit before tax rose 16%. There has been a robust growth in External Businesses led by Wheat, Rice, Leaf Tobacco, Aqua and Spices exports. Margin expansion driven by favourable business and customer mix. Shortage in availability of shipping containers/port congestions and weather-based challenges towards the end of the quarter delayed customer call-offs.

Paper & Paperboards

Paperboard and Paper sales up 25.4% to Rs 1,830 crore. The EBIT roe by by 23.8% to Rs 410 crore Benefits of backward integration and improved mix neutralised higher input costs. Higher realisations, investments in pulp import substitution, cost-competitive fibre chain, sharper focus on operational efficiency leveraging data analytics enabled margin expansion despite escalation in key input prices.

ITC quarterly results: review

ITC has reported a good set of numbers in the Jul-Sep 21 period. Recovery in cigarette sales, FMCG-others business and a rebound in its hospitality segment as footfalls rose aided the performance during the quarter. Despite inflationary raw material prices, ITC was able to maintain its margins due to cost savings and judicious price hikes.

While the company has been trying to reduce dependency on the Cigarette business and increase its focus on the FMCG segment, the Cigarettes business is likely to contribute over 82% to ITC’s overall EBIT even in FY23E (from 85% in FY20), according to estimates by Motial Oswal. Given the over-reliance on this segment, ‘sin taxes’ will remain a key overhang on the firm.  If the government is unable to meet its revenue targets through taxation, it may need to continue to lean on taxing “sin goods”, such as cigarettes. 

ITC Q2 earnings: Brokerage review

Most of the brokerages have retained their bullish view on the stock. Jefferies has a target price of Rs 300 on the stock (from Rs 275 earlier). In a base case scenario, the brokerage forecasts 12% annual growth in cigarette EBIT over FY21-24E on a low base and a 11% growth in FMCG revenues in constant currency terms. Cigarette margins are likely to expand by ~140 basis points over FY21-24E as price hikes should more than offset tax hikes. 

Emkay has maintained a 'hold' rating on the stock with a revised price target of Rs 265 (earlier Rs 238). According to the research house, the cigarette opportunity in India remains attractive given per capita consumption. However, investing modalities have changed with environmental, social and governance standards assuming a significant role, noted the firm. The decision of the panel on tobacco tax and the upcoming Union Budget are key variables. High incidence of taxation poses a threat, according to Emkay.