Cigarette and FMCG saw impressive numbers; FY22 a year of recovery; ‘Buy’ retained with unchanged target price of Rs 305
At a time when most peers witness margin headwinds, every single segment of ITC has seen stable to expanding margins in Q4, with smart gains in cigarette & FMCG. Cig. volume growth at 9% is impressive with double-digit Ebit growth, broadly in line. >20% Ebitda growth is a key positive in FMCG. Dividend pay-out improves to c.95% while capex is near-flat y-o-y – this drives up RoE to a 7-Y high of 25%. ITC stands out given high margin visibility & we retain Buy.
In-line Q4: ITC’s Q4 standalone Ebitda grew 17% y-o-y to Rs 52.2 bn, in line with our estimates. Growth was led by the cigarette business, which saw a 12% Ebit growth (in-line). FMCG business surprised positively, both on revenue and margin fronts. Paperboards also performed better than expected, although this was offset by a miss in hotels (3rd wave impact) and agri business. EPS growth was a tad lower (+12% y-o-y) due to lower other financial income.
Cigarette recovery: Net cigarette revenue grew 10% y-o-y, with volumes up c.9%, in our view. Management highlighted continued broad-based recovery, with minimal disruptions due to the third Covid wave. Volumes were above pre-Covid level for the second consecutive quarter.
FMCG outperforms: FMCG revenue grew 12% y-o-y (vs. 9% in Q3), better than estimates. Growth was led by discretionary/ out-of-home categories as mobility improves. Staples and convenience foods also were resilient, while hygiene portfolio saw volatility. Re-opening of schools/colleges aided recovery in education and stationery portfolio which enjoys better margins. FMCG profitability also surprised positively, with Ebitda margin up 75bps y-o-y to 9%, despite inflationary headwinds.
FY22: FY22 was a year of recovery for ITC, despite hiccups from second Covid wave. Ebitda grew 22% y-o-y (2Y CAGR: 3%) led by 17% cigarette Ebit growth (2Y: flat), 11% growth in FMCG Ebit, lower losses in hotels and a 40% jump in agri +paperboards Ebit. EPS growth was lower (+16%), due to reduced other income.
Higher dividend, lower capex: ITC announced a final dividend of Rs 6.5, taking the full year dividend to Rs 11.5 (>4% yield), up 7% y-o-y. Capex spends were limited to Rs 17 bn, broadly similar to FY21. FCF conversion was also healthy at >80% of pre-exceptional PAT.
Maintain Buy: We largely retain our FY23/24e EPS estimates. While FMCG peers combat growth slowdown and RM pressures, ITC is seeing a recovery in earnings, with good momentum across verticals and high margin visibility. Higher dividend payout and lower capex are also encouraging. We retain Buy with an unchanged PT of Rs 305.
