ITC stock slips despite good performance in September quarter

All analysts are bullish on the firm with target prices ranging from Rs 375 to Rs 490

Tobacco major ITC, which also has large exposure in other agro-sectors, as well as in paperboards and hospitality, delivered good results in the July-September quarter for the 2022-23 financial year (Q2FY23).

There was a strong recovery in cigarette volumes, to around 21 per cent year-on-year (YoY), with management saying it has managed to claw back market share from smuggled tobacco. Overall earnings before interest, tax, depreciation and amortisation (ebitda) grew 27 per cent YoY with FMCG, paperboards and agro businesses also doing well. Hotels also climbed to above pre-Covid-19 levels.

The ebitda margin was more or less stable, YoY, at 36.5 per cent, but it improved materially by over 350 basis points quarter-on-quarter (QoQ). The non-cigarette ebit (earnings before interest and tax) showed 48 per cent growth, which was 2x that of ebit growth in the cigarette department.

The quality of earnings may have improved due to lower other income or OI (down 25 per cent YoY). The drop in OI is due to a mark down of the company’s bond portfolio due to rising interest rates. The FMCG segment revenue was up 21 per cent YoY, with faster growth in e-commerce. Raw material inflation pushed down segment ebitda margins a little to 9.5 per cent.  

In Paperboards, recovery continued, with revenue up 25 per cent YoY and ebit up 54 per cent YoY and margin up 500 bps. In hotels, revenue grew 80 per cent YoY with ebit margin at 16 per cent which was above pre-Covid-19 levels, led by higher ARR (average room rate) and occupancy, and better cost structuring.

The Agro segment revenue grew 44 per cent YoY, with ebit up 17 per cent YoY, led by wheat, rice and leaf tobacco exports. ITC Infotech, the wholly owned subsidiary, registered 9 per cent YoY growth in revenues to Rs 821 crore (Rs 749 crore) but ebitda dipped to Rs 135 crore, from Rs 211 crore. The drop was attributed to higher employee costs in line with the IT industry trends and to some costs associated with strategic partnership with Nasdaq-listed PTC, along with a partial acquisition of PTC.  

The management mentioned targets, such as enhancing the share of renewable energy to 50 per cent of total energy consumption by 2030 and meeting all purchased grid electricity requirements from renewable sources. Another target is 40 per cent reduction in specific water consumption by 2030 against 2018-19, with the creation of rainwater harvesting potential equivalent to 5x net water consumption.

Specific energy consumption is to be reduced by 30 per cent and specific Greenhouse Gas emissions by 50 per cent by 2030 against 2018-19. All packaging is to be reusable, recyclable or compostable or biodegradable by 2028. The company hopes to directly or indirectly support sustainable livelihoods for 10 million people by 2030.

One assumption for future growth is a stable tax environment for the cigarettes category. There could be a cyclical flattening of margins in paperboards but the FMCG division could benefit from lower raw material costs.

The hotels division is likely to see a rebound in line with economic growth. The Agro business has seen gains in exports due to the unusual global situation caused by the Ukraine War – it has built relationships which could stand it in good stead. Growth in hygiene products is low, but still better than pre-Covid-19 levels.

All analysts have ‘buy’ or ‘add’ recommendations with most offering upgrades on their estimates. The target price/fair value estimates vary from Rs 375 to Rs 490 for different assumptions. However, the stock lost around 1.5 per cent, to close at Rs 344.55 on the BSE following the results.