SPLENDID GROWTH CONTINUES FOR ITC IN CIGARETTES, FMCG

News:

·  Revenue witnessed growth of 26.6% to Rs 17159.6 crore (Idirect estimate : Rs16986.6 crore) led by splendid growth in cigarettes, FMCG & paperboard segments. Agri & Hotels business also grew at stronger pace on the back of lower base quarter sales. Cigarettes business sales was up by 23.3% led by ~20% volume growth & ~3% product mix improvement.  FMCG, Paperboard, agri & Hotels business saw robust growth of 21%, 25%, 44% & 81.8% respectively

·         FMCG business growth was led by strong performance across categories except hygiene product portfolio. FMCG margins (EBITDA) contracted by 50 bps to 9.5% in Q2FY23. It is important to note that operating margins expanded by 280 bps compared to Q2FY20 (pre-pandemic quarter).  Paperboard business continue to witness strong pricing led growth during the quarter. The end user industries of paperboard business have been clocking higher than pre-pandemic volumes

·         Hotels business occupancy levels have crossed 70% (except for newer properties). Further Average Room Revenue (ARRs) have been higher than pre-Covid levels. Moreover, hotels business operating margins was higher by 860 bps compared to the Q2FY20 (pre-Covid period). Though, Agri business has grown at 44% YoY basis on a low base, it is down 47% sequentially after export ban on wheat.  However, wheat contracted for exports before the ban were allowed to export during the quarter

·         The company maintained its gross & operating margins despite huge commodity pressure in FMCG business. We believe impact of commodity inflation would have been off-set by operating leverage. Operating profit grew by 27.1% to Rs 5864.3 crore (Idirect estimate : Rs 5811.0 crore) with sustained operating margin at 34.2% (12 bps up). Other income was down 25.1% to Rs 506.9 crore given reduction in cash & investments after company adopted the policy of 85% dividend pay-out. Net profit grew by 20.8% to Rs 4466.1 crore (Idirect estimate : Rs 4280.6 crore)

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 ITC continued its growth momentum across categories in Q2FY23. The cigarettes category has been benefited by stable taxation, market share gains with aggressive trade promotions and newly launched premium brands in last one year. FMCG business is witnessing strong growth specifically in underpenetrated foods category & strong traction from education & stationary business (fully functional education institutions have propelled growth after two years). Further, paperboard business is not only benefited by pricing growth but it is also gaining volumes across user industries. Hotels business has been benefited by pent-up demand conditions after two years of Covid impacted sales. Given, Q3 is peak quarter for travel, the hotels occupancies & ARRs are likely to remain robust in near future. We believe ITC would continue to grow sales in its core business of Cigarettes and FMCG with stable taxation & softening of raw material prices. We remain positive on ITC from long term growth perspective.

Impact:

Positive.