ITC Ltd recorded a resilient revenue growth ahead of estimates, with stable performance across segments, led by Agri Business and Hotels and in-line performance in Cigarettes and FMCG categories. With the conglomerate posting a stable cigarette volumes growth trajectory at around 3 per cent despite calibrated price hikes to navigate cost inflation, and a lower EBIT growth of 5 per cent, brokerage firms remained focused on the category. Amnish Aggarwal, Director – Research – Institutional Equities, PL Capital – Prabhudas Lilladher, said, “Cigarette volumes grew by around 3.3 per cent as ITC continued to invest behind brands and go to market initiatives. We remain optimistic on cigarette demand and expect further increase in volume growth; margins are unlikely to improve due to higher leaf tobacco prices.”
ICICI Securities said, “ITC’s Q2FY25 exhibited a resilient revenue growth performance with a stable performance across segments with cigarette volumes growth trajectory stable at around 3 per cent YoY, despite calibrated price hikes to navigate cost inflation. Importantly, unchanged taxation on cigarettes will likely sustain market share gain trajectory from illicit industry (~25 per cent of overall cigarette industry). Formal cigarette industry continues to have tailwinds of: 1) stability in taxes and 2) deterrent action by enforcement agencies. We expect the formal industry to drive volume growth (from peak levels) if these tailwinds sustain. Margins were under pressure due to commodity inflation across business segments and inferior mix (higher share of agri business).” ITC’s cigarette segment reported net revenue growth of 7.3 per cent YoY with differentiated and premium offerings continuing to perform well.
ITC had released its fiscal second quarter earnings yesterday with profit growth of 1.9 per cent YoY to Rs 992.87 crore. Revenue was recorded at Rs 22,281.89 crore, up 15.6 per cent as against Rs 19,270.02 crore during the same period of previous financial year, driven by Agri Business and Hotels. Axis Securities said that ITC delivered strong revenue growth driven by impressive performance in the Agribusiness (up 47 per cent YoY) and the hotel segment (up 12.1 per cent YoY). The Cigarette business grew 7.3 per cent YoY with 2-3 per cent volume growth, in line with estimates, while the FMCG business reported slower growth of 5.4 per cent YoY due to a broad-based slowdown in the FMCG sector. However, the Paperboard business was adversely impacted by cheap Chinese imports, weak domestic demand, and rising wood prices.
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“We believe ITC’s long-term growth outlook remains strong as most businesses (excluding Agri & Paper) are on track with 1) Growth in cigarette volumes remaining stable, led by differentiated and premium offerings; 2) The FMCG business reaching its inflexion point as EBIT margins continue to increase, driven by the ramp-up in outlet coverage, effective implementation of localization strategy, premiumization, use of demand and supply-side technologies, and moderating raw material input costs; and 3) The Hotel business maintaining its strong performance on a high base. Furthermore, the demerger of the hotel business will strengthen ITC’s balance sheet and improve its return ratios. Additionally, the reasonable valuations provide a margin of safety,” the report by Axis Securities stated.
Performance across business verticals
While we delved into ITC’s cigarette business performance, here is how the cigarettes to hotel conglomerate performed across its varied business verticals:
FMCG: ITC’s FMCG segment reported revenue growth of 5.4 per cent YoY to Rs 5578 crore amidst muted demand conditions and heavy rains that impacted discretionary spending and out-of-home consumption. Axis Securities said, “Segment revenue grew by 5.4 per cent YoY, driven by broad-based growth across key categories such as Staples, Biscuits, Snacks, Frozen Snacks, Dairy, Premium Soaps, Homecare, and Agarbatti. Reported EBIT margins stood at 7.9 per cent, a decline of 37 bps YoY, primarily due to inflationary pressure on input costs. The Notebooks category faced challenges from a high base effect, falling paper prices, and increased competition from local brands. Competitive intensity heightened in categories such as Noodles, Snacks, Biscuits, and Popular Soaps. Strong growth was observed in emerging channels like e-commerce, quick commerce, and MT.” Another report by Motilal Oswal Financial Services said that ITC’s FMCG business continues to enjoy industry-leading growth over peers due to the company’s category presence.
Hotels: The Hotels segment delivered strong performance on high base with revenue growth of 12.1 per cent YoY, driven by F&B, Retail and Wedding segments. EBIT increased by 20.2%, with margins improving by 140 bps YoY to 20.8%, despite a higher base with Q2FY24 having G20-related business. Further, the hotels business demerger is progressing as per schedule with a scheme sanctioned by NCLT. “After the demerger of its asset-heavy hotel business, ITC’s return profile will also improve,” said Motilal Oswal Financial Services.
Agri Business: The segment recorded revenue growth of 47 per cent YoY led by leaf tobacco & value added agri products. In spite of growth in high-value-added agri-products and leaf tobacco, EBIT margin declined by 121 bps YoY to 7.9 per cent, due to inflation in leaf tobacco, said JM Financial.
Paperboards, Paper and Packaging: The segment posted revenue growth of 2.1 per cent YoY driven by exports. “The paperboards, paper, and packaging segment faced challenges due to low priced Chinese imports affecting global markets (including India), soft domestic demand, surge in domestic wood costs, and subdued realizations due to increased competition and costs,” said Motilal Oswal Financial Services. The quarter also witnessed unseasonal adverse rains impacting wood availability, quality and its procurement price. Axis Securities added, “Initiatives such as accelerating plantation programs, improving the wood supply chain, and collaborating with policymakers are being pursued to mitigate the impact of escalating costs and imports.”
To conclude, JM Financial said, “Factoring weak EBIT growth in H1, we have cut our estimates by 3 per cent. Going ahead, price/mix trend (especially in challenging operating environments in terms of demand and RM) in Cigarettes will be key monitorable for acceleration in EBIT growth. Similarly, pace of recovery in FMCG also needs to be watched especially due to heightened competitive scenario in Foods. Overall stability in taxation for Cigarettes, relatively better performance in FMCG sales and stable to improving trend in cyclical businesses is a positive.”
In terms of risks, Axis Securities said that increase in competitive intensity in Cigarettes, RM inflation, and the slowdown in the economy impacting Hotels and other cyclical businesses, will remain key.
From: financialexpress
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