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ITC Ltd>
  • CMP : 412.1 Chg : 2.55 (0.62%)
  • Target : 500.0 (19.05%)
  • Target Period : 12-18 Month

19 May 2023

Cigarette volume grows, FMCG margin in top gear

About the stock

ITC is biggest cigarettes & second largest FMCG company in India with ~80% of market share in cigarettes & presence in staples, biscuits, noodles, snacks, chocolate, dairy products & personal care products. The company is also present in paperboard, printing & packaging business, agri & hotels businesses

The company has more than 200 manufacturing facilities in India. It has a distribution reach of over 6 million retail outlets across various trade channels & strong 25 brands across various categories

Q4FY23 Results

ITC reported robust cigarette volume growth of ~12%.

  • Sales were up 6.6% YoY led by strong growth in cigarettes & FMCG sales
  • EBITDA was at ₹ 6209.4 crore, up 18.9% YoY, with margins at 36.1%
  • Consequent PAT was at ₹ 5086.9 crore (up 21.4% YoY)
What should investors do?

ITC’s share price has given return of 53% in last five years (from ₹ 272 in May 2018 to 420 in May 2023).

  • We raise our cigarette volumes growth estimate from 5% to 8% for FY24E considering market share gains from illicit cigarettes as well as strong growth in high price cigarettes
  • We maintain our BUY recommendation
Target Price and Valuation

We value the stock at ₹ 500 on SOTP basis valuing cigarettes business 22x FY25 earnings & FMCG business 6x FY25 sales.

Key triggers for future price performance
  • Taxation (GST & Excise) on cigarettes have remained largely stable over the last five years. This along with deterrent action against illicit & contraband cigarettes resulted in strong ~19% volume growth in FY23. We estimate 8% & 5% volume growth for FY24E & FY25E, respectively
  • FMCG business has seen four-year sales CAGR of 11.2%, which is faster compared to many other FMCG companies. We believe foods portfolio has strong opportunity size with high margin expansion possibility. The company intend to increase margins by 100-150 bps every year
  • Hotels business occupancy levels have been maintained at above 70% & ARRs are above pre-pandemic levels. We believe the company would be able to maintain this strong growth in hotels business in medium term
Alternate Stock Idea

We like Tata Consumer in our FMCG coverage.

  • Strong innovation & premiumisation strategy in salt, tea, Sampaan & Soulful in the Indian market expected to drive sales & margins
  • We value the stock at ₹ 980 with a BUY rating

Key Financial Summary

(| Crore) FY20 FY21 FY22 FY23 5 Year CAGR (18-23) FY24E FY25E 2 Year CAGR (23-25E)
Net Sales 46,323.7 48,151.2 59,101.1 69,480.9 10.7 74,136.1 81,648.4 0.1
EBITDA 17,904.3 15,522.5 18,933.7 23,944.5 7.1 26,131.9 28,076.9 0.1
EBITDA Margin % 38.7 32.2 32.0 34.5 - 35.2 34.4 -
Net Profit 15,136.1 13,031.6 15,057.8 18,753.3 8.1 20,106.8 21,720.1 0.1
EPS (|) 12.3 10.6 12.2 15.1 7.7 16.2 17.5 0.1
P/E 34.1 39.6 34.3 27.8 - 25.9 24.0 -
RoNW % 23.8 22.1 24.5 27.7 - 29.6 31.8 -
RoCE (%) 29.4 28.2 31.4 35.6 - 38.7 41.4 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter

Q4FY23 Results: Cigarette volumes grew 12%; FMCG margins inch up

  • ITC witnessed revenue growth of 6.6% to | 17506.1 led by 14.2% growth in cigarette business & 19.4% growth in FMCG business. Hotels business saw 100% growth with significant improvement in mobility in last one year


  • The 14.2% growth in cigarettes business was led by ~12% volume growth & 2% realisation growth. The company is gaining market share from illicit & contraband cigarettes. Moreover, stable taxation has resulted in category growing at faster pace


  • We believe above | 10 price point category is witnessing strong traction & growing at 20-25%. Some of the new variants like ‘Classic Connect’, ‘Gold Flake Indie Mint’, ‘Wills Fab’ among others are getting strong traction


  • Cigarette business also strengthened its presence in Duty-Free outlets at International as well as Domestic airports. It also launched differentiated products in focus market


  • The 19.4% growth in FMCG business was led by ~8% volume growth & ~11% realisation growth (Pricing & Mix). The company witnessed strong growth in Atta (led by high pricing growth), Biscuits, Noodles, Juices & Snacks. Personal care category also saw decent growth except Hygiene product portfolio (Savlon), which would be down by 40-50% from peak


  • New launches & foray in newer categories under Aashirwad (Besan, Vermicelli), Sunfeast (Supermilk biscuits, Thin Arrowroot biscuit) & B-Natural Smoothies (Tender Coconut Water, Strawberry & Chia seeds) among others supported the growth in FMCG business in Q4.


  • Education & Stationary business continue to witness strong growth before the start of new academic year. Moreover, fully functional schools & collages also aided the growth in the segment


  • Ecommerce, quick commerce & modern trade channels are growing faster than general trade channel. Moreover, new launches through these channels have become much easier


  • FMCG business saw 352 bps operating margin improvement (EBITDA) to 13.3% during the quarter led by strong growth in Foods business, supply chain management, price increase, higher contribution from education & stationary business & PLI benefits (export of Biscuits, Snacks, Dairy & RTE). On full year basis FMCG business operating margin was up 117 bps at 10.2% (FY23)


  • The company continued to drive premiumisation trend in both cigarettes & FMCG business across categories. It intends to improve FMCG margin by 100-150 bps every year


  • Hotels business revenue saw 100.6% growth to | 782 crore in Q4 led by more than 70% occupancies & Sustainable increase in ARRs (Average room revenue). Segment EBITDA was |272 crore (margin 34.8%) as against |108 crore (margin 23.1%) in FY20 (pre-Covid period)


  • The company is continuing the strategy of asset light model for hotels business with the launch of 11 new hotels under management contract with brands like ‘Mementos’, ‘Storii’, ‘Welcomehotels’ & ‘Fortune’ during the year. It has healthy pipeline for FY24 with phased opening of new hotels under these brands


  • Agri business saw 18% decline mainly on the back of restriction on wheat exports however segment sales were up by 20% excluding wheat sales. Segment margins (PBIT) grew by 25.9% led by         strong export demand from leaf tobacco & value-added products



  • Paperboard business witnessed 1.8% growth impacted by decline in paper pulp prices from the highs in last year. The growth was also impacted by planned shut-down of pulp mill for the capacity expansion during the quarter. Segment margin (PBIT) was down by 1% with 56 bps margin contraction


  • The company commissioned second carton line in Nadiad plant (started in FY23). The demand for fine paper segment was high with strong growth in notebook & Publications


  • Operating profit grew by 18.9% to |6209.4 crore with operating margin expansion of 385 bps to 36.1%. Strong cigarette volume growth, softening of commodity prices & lower contribution of agri commodity trading business led to expansion in gross as well as operating margin during the quarter. Net profit grew by 21.4% to | 5086.9 crore

  • ITC Infotech business witnessed 16.4% revenue growth to |3321 crore in FY23. However, operating profit for the business declined by 19.2% to |579 crore mainly due to cost related to strategic partner agreement signed with PTC