ITC Ltd 1QFY20 result update: Cigarette revenues and margins continue to improve

• The total revenues grew 6% YoY to Rs 113,614 mn for the quarter. The revenues from cigarettes business were reported at Rs 54,334 mn, YoY growth of 6% in 1QFY20. The FMCG/ Hotels/ Agri/ Paperboards business grew 8%/ 15%/ 15%/ 13% respectively in 1QFY20.
• The total EBIT was reported at Rs 48,270 mn, YoY growth of 12%. The Cigarette business, which contributed 86% of the total EBIT of the company, reported EBIT margins at 70.8%, YoY growth of 140 bps. Hotels and Agri business margins were under pressure with a decline of 130 bps/ 60 bps at 2.6% and 5.6% respectively.
• The net profit for the quarter was Rs 31,739 mn, YoY growth of 13% as compared to Rs 28,187 mn in 1QFY19. The calculated tax rate was at 34% for the quarter.

Key highlights from the press release:

• Cigarettes: A punitive and discriminatory taxation and regulatory regime, together with a sharp increase in illegal trade in recent years, continues to pose significant operating challenges to the legal cigarette industry in the country. Performance during the quarter was also impacted by weakness in the overall demand environment. Excessive taxation has made legal, duty-paid cigarettes in India amongst the costliest in the world in terms of per capita affordability.
• FMCG: Amidst the market slowdown across urban and rural markets, the FMCG business reported a YoY growth of 8% led by Atta, Potato Chips, Premium Cream Biscuits and Noodles in the Branded Packaged Foods Business, Liquids (Handwash & Bodywash) in the Personal Care Products Businesses and Notebooks in the Education & Stationery Products Business. The segment EBITDA reported YoY growth of 41% despite stepped-up investments in brand building, gestation and start-up costs of new categories.
• Hotels: Revenues grew 15% on the back of new properties, amidst relatively soft demand conditions. In spite of reporting 18% YoY growth in EBITDA, the segmental EBIT declined 21% as the additional depreciation pertaining to new properties weighed on segment results. The Business made steady progress during the quarter in the construction of an ITC Hotel in Ahmedabad and WelcomHotels in Amritsar, Guntur & Bhubaneswar.
• Agri Business: The company has recently forayed into Frozen snacks segment under ‘ITC Master Chef’ brand and it continues to be scaled up. However, lack of trading opportunities in Oilseeds and Pulses, subdued demand for leaf tobacco in international markets, relatively steeper depreciation in currencies of competing origins in recent years and adverse business mix weighed on Segment Results.
• Paperboards business: The company strengthened the business on the back of strong volume growth in value-added paperboard segment and product mix enrichment. The growth in the Packaging & Printing Business was impacted due to sluggish demand conditions in the FMCG industry and exports. Capacity utilisation of the recently commissioned facilities, viz., Value Added Paperboard machine, Bleached Chemical Thermo Mechanical Pulp mill and Decor machine, was further ramped up during the quarter.

Consensus Estimate (Source: marketscreener website)

• The closing price of ITC Ltd is Rs 260/- as on 6^th August 2019. It traded at 23x / 21x the consensus EPS for FY 20E / FY 21E of Rs 11.2 / 12.5 respectively.
• Consensus target price of Rs 332/- implies a PE of 27x on FY21E EPS of Rs 12.5/-.

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