We believe that the thesis of broadening of growth levers for ITC is unfolding as expected. Few of ITC’s other businesses have witnessed encouraging growth traction in recent times: volume growth in the FMCG business and growth outlook in the hotel and paper business.
ITC’s Q3 FY19 topline is slightly ahead of our expectations (14.9 percent year-on-year), aided by double-digit growth in the non-cigarette business. Earnings before interest, tax, depreciation and amortisation (EBITDA) margin improved sequentially on account of operating leverage seen in the FMCG (other than cigarette) and hotels businesses. Net profit, on like-for-like basis was up 13.8 percent. It’s noteworthy that in the base quarter, the company benefited from Rs 270 crore exceptional item due to a favourable court ruling for Tamil Nadu entry tax.
Revenue growth in the cigarette business benefited from 6-7 percent volume growth on a base of -4 to -5 percent in Q3 FY18. However, moderation in operating profit (-109 bps quarter-on-quarter) weighed on the stock as it implied downtrading.
Result snapshot
Source: Company
The quarter under review underpins improving trend for its other businesses. On a YoY basis, hotels, paperboards and FMCG segments are moving ahead from strength to strength. FMCG sales growth of 11.5 percent is a tad lower than domestic sales growth of Hindustan Unilever (13 percent). Its 76 bps YoY margin improvement at the earnings before interest and tax (EBIT) level draws attention.
The hotels business is seeing a steady improvement in sales, with operating leverage playing out in the seasonal month. Paperboards business also had a healthy sequential improvement in sales, with operating margin slightly lower than the previous quarter (21.5 percent versus 21.8 percent in Q2 FY19)
Segmental performance
Source: Company
Broadly, the result was as per our expectation. Volume trend in cigarettes is as anticipated, though a possible trend for downtrading needs a close watch as the recovery is in a fragile phase. We take solace from the fact that the fiscal/taxation side of the cigarettes business has likely stabilised, if the recent GST Council meets are any indication. We believe that fund requirements for the special situation needs like Kerala rehabilitation effort may not be exclusively levied on sin goods like cigarettes and other tobacco products.
The thesis of broadening of growth levers for ITC is unfolding as expected. Few of ITC’s other businesses have witnessed encouraging growth traction in recent times: volume growth in the FMCG business and growth outlook in the hotel and paper business. The stock is currently trading (24.5 times FY20 estimated earnings) at a significant discount to the FMCG sector’s trading multiple. Given this context, we remain constructive on the stock.
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