Cigarette volume rose ~30% YoY in 1QFY22 (our view) — decrease disruption in the second wave and a swift recovery post normalcy (vs last year) is reassuring (two-year CAGR ~-12%). FMCG income grew +10% YoY in spite of pockets of weakness functionality in the wellness and hygiene categories continued to be powerful even though it lapped a higher base in staples and comfort foods. Focus continued on augmenting distribution with FMCG segment seeing steady margin expansion.
We highlight that ITC has higher income salience from south India (ala Jyothy Labs, V-Guard and so on.) and therefore stricter lockdowns in Kerala and Tamil Nadu has most likely impacted 1QFY22 functionality (one-off). We see (1) possible marketplace share gains in the cigarettes (cyclical share achieve era of VST and GPI may perhaps be coming to an finish), (2) FMCG scale up and profitability improvement to continue and (3) possible to accelerate expense savings by means of a provide chain recast. Reiterate ‘add’ target price tag Rs 240.
Cigarette volumes develop ~30%: Company income was up 37% even though ebitda was up 51% YoY PAT development was slightly decrease at 29% YoY largely due to decrease other revenue. Cigarette gross revenues grew 33% YoY, with volume development of 30% (two-year CAGR: -12%). Fresh round of mobility restrictions weighed on volumes even as it had virtually recovered to pre-Covid levels in 4QFY21 on the other hand, recovery in volumes (considering that mid-June-21) is swift compared to the initially wave. Cigarettes EBIT was up 37% YoY to Rs 32.2billion. Volume weakness was more pronounce Kerala, Odisha and the Northeast area. ITC strengthened its provide chain by (1) strengthening direct attain in target markets and (2) augmenting stockist network in rural/semi-urban markets.
FMCG profitability expansion continued but at a moderated pace: FMCG revenues grew 10% YoY (two-year CAGR: 10%) on a reported basis. On a comparable basis, income grew 18.8% (education and stationary items segment continued to stay weak). Management highlighted that (1) Hygiene items saw powerful sequential development and grew even on a hard base of last year. (2) Staples and Convenience Foods saw a fantastic sequential uptick but there was no pantry loading advantage for the quarter and (3) Discretionary and OOH item segments reported powerful development (YoY) on a weak base. Segment EBIT was up 38% YoY on a reported basis. Segment EBITDA was up 16% with margin expansion of 40bps YoY.
Valuation and dangers: We elevated our earnings estimates by ~2%. Maintain ‘add’ with a DCF-based target price tag of Rs 240. At our target price tag, the stock will trade at 17x P/E many Mar’23E. Key downside threat is tax hikes substantially ahead of inflation top to volume stress (on cigarettes) as price tag elasticity is nevertheless unfavourable.