The strong revenue growth was driven mainly by the agri business, which doubled y-o-y. Gross revenue (ex-agri) was up 16.2% y-o-y, only slightly above our expectation.
ITC reported growth in standalone net sales of 32.5%, with Ebitda up 18.2% and profit-after-tax (PAT) up 12.7% year-on-year (y-o-y), roughly 20%, 7% and 6% above consensus. The strong revenue growth was driven mainly by the agri business, which doubled y-o-y. Gross revenue (ex-agri) was up 16.2% y-o-y, only slightly above our expectation. The gross margin contracted by 580bp y-o-y, to 51.3%, amid steep commodity inflation while the Ebitda margin declined 388 bps, to 32.2% and an interim dividend of Rs 5.25/share was announced in the quarter.
Cigarette sales rose 13.6% y-o-y, with Ebit up 14.4% on a broad-based recovery, led by higher mobility and focused market/portfolio interventions, but off a low base. Cigarette Ebit grew at a two-year CAGR of 2.6%. Others recorded y-o-y sales growth of 9.3%, with Ebitda up 3.7%, off a high base, backed by robust growth in the discretionary/out-of-home categories. Steep input cost inflation pulled down segment’s Ebitda margin slightly, to 9.1% (down 50 bps y-o-y).
The hotels business sustained its recovery momentum (up 2x y-o-y and 61% q-o-q), with occupancy back to pre-pandemic levels. The agri business recorded an impressive 2x jump in sales, led by strong exports. However, the segment’s Ebit margin was down 195 bps, to 6.0%. Paperboards, paper and packaging reported strong y-o-y sales growth of 38.5%, with Ebit up 57%, driven by a revival of demand in end-user segments. ITC Infotech reported 9MFY22 sales, Ebitda and PAT growth of 21%, 42% and 48% y-o-y, respectively, aided by improved business mix.
The company is both a growth and yield play, in our view. ITC is aggressively building its e-commerce capabilities and making its own D2C foray along with a plethora of innovations and product launches. Cigarettes (85% of earnings) is largely a yield play, as structural high earnings growth prospects have weakened over the years. It is subject to adverse ESG considerations and an uncertain taxation guidance path, which implicitly raises hurdle rates for investors.
Even as Q3 has done well, underlying Ebit growth remains weak and is unlikely to impact the long-term valuation materially. The hotels segment is recovering, but remains insignificant in the overall valuation. At a current FY23 PE of c18x, ITC appears an outlier within the consumer sector, largely because its cigarette business is no longer being valued as the high sustainable Ebit growth business it used to be, in our view.
Stay Hold with unchanged target price of 250: We adjust our estimates and roll forward our valuation base. The changes offset each other, and our target price remains
250.
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