Q2FY22 results of ITC Ltd.
HDFC Securities has stated in its research report that “ITC delivered in-line revenue growth, with a few positives in key segments. Revenue was up 12% YoY with cigarettes/FMCG/hotels/agri/paper growing 11/3/254/-7/25% YoY. Cigarette revenue growth was 10%, with a volume growth of 9.5%. Given the positive growth rate for cigarette volumes and potential for price hikes, we expect a sustainable cigarette recovery in H2FY22. Cigarette EBIT growth was at 10%. FMCG business registered steady 6% growth and clocked 11% two-year CAGR. FMCG EBITDA margin was at 10% (+30bps YoY, >300bps in Q2FY20) despite commodity headwinds.”
The brokerage has also added that “The discretionary/OOH categories recorded strong YoY and sequential growth due to increased mobility. Staples and convenience foods growth remained moderate on a high base and saw a sequential pick-up this quarter as well. The company performed well across all channels, including MT, eCommerce (7% revenue share) and rural. It increased its market coverage/direct outlet servicing by 1.4/1.1x YoY. Hotel occupancy improved 3x over Q2FY21 and ARRs improved as well. Hotels saw strong cost control but reported an EBIT loss of INR 480mn (vs IRs 1.8bn in Q2FY21) due to negative operating leverage. The agri business exports saw strong growth in wheat, rice, leaf tobacco, aqua and spices. The paper business clocked 25% YoY growth, led by value-added products and demand revival. The paper margin improved, led by higher realisations, investments in pulp import substitution and cost-competitive fibre chain.”
Buy ITC Ltd With A Target Price of Rs. 272
The brokerage has claimed in its research report that “ITC stock has underperformed the sector and benchmarks over past few years due to concerns, including environment social and governance (ESG) norms (leading to outflow of FPI money), regulatory/competitive challenges in the core cigarette business, and concerns over capital allocation. Doing a deep-dive into financials, we found that ~60% of ITC’s cash flows have been paid as dividends, while only 15% has been utilized to scale up capacities across segments, with the majority deployed in the promising FMCG business, followed by hotels and paper & packaging business. The remaining portion is held as non-core investments. Paper/agri businesses are generating healthy ROCE and are capable of self-funding CAPEX needs but hotel segment is playing a spoilsport.”
“However, the company has developed a sizeable footprint in hotels and the management has noted that it will henceforth go asset-light for hotels, where the focus would now be on managed properties. In the FMCG business, with significant front-end investment already done to build capacities, we expect a material decline in annual organic CAPEX here. Financial re-engineering (apart from a recent increase in dividend payout ratio to 80-85%) can unlock value: de-merger of capital guzzling and low-return-generating hotels business – since incremental expansion is expected to happen through management contract route and hence may not require cash infusion from parents, and listing of ITC InfoTech – revenue of Rs 2445 Cr in FY21 – since it is completely unrelated to core cigarettes business. Cross synergies and ITC’s big ambitions for FMCG may restrict any demergers here but the scaling up of the FMCG business could provide another strong FCF generating business” HDFC Securities has clarified.
According to the brokerage’s call “Strong recovery in cigarettes business, focus on profitable growth in FMCG business – With the resumption of normalcy and higher mobility, we expect demand trends to improve to achieve cigarette recovery. A gradual FMCG business turnaround with improving profitability remains another important catalyst for stock outperformance over the medium term. At 14.3x Sept’23 EPS, ITC trades at a steep discount to the FMCG sector. At these valuations, there is limited downside risk, and the risk-reward ratio in the current market scenario is favorable for ITC. We feel investors can buy the stock in Rs 229-234 band (14.3x Sept’FY23E EPS) and add more on dips in Rs 204-209 band with a base case target of Rs.257 (18x Sept’FY23E EPS) and a bull case target of Rs.272 (19x Sept’23E EPS).”
The stock has been picked from the brokerage report of HDFC Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.
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