ITC's stock may remain range-bound post July-September quarter show

Conglomerate ITC’s results for the July-September quarter of 2023-23 (Q2FY24) on a consolidated basis were broadly in line with brokerage estimates.

While the performance of the cigarette business was in line with expectations, non-cigarette fast moving consumer goods (FMCG) lagged.

At the operating level what dented the overall performance was the sharp drop in the margins of the paperboard business. 

This segment saw a 9.5 per cent decline in sales due to the muted domestic demand and higher supplies of lower priced Chinese products in the global market.

A sharp rise in the prices of wood and coal coupled with lower volumes led to a 50 per cent drop in the profit before interest and taxes for the segment.

Standalone operating profit was up 3 per cent year-on-year (Y-o-Y), half of what the Street was working with due to the weak paperboard business performance. 

Brokerages will keep a close eye on the performance and outlook of the largest ITC’s divisions — cigarettes and other FMCG products.

On the back of a 4.5 per cent rise in volumes, the cigarette business delivered a sales growth of 8.5 per cent.

Say analysts led by Jaykumar Doshi of Kotak Research: “ITC’s cigarette volume growth of 4.5 per cent Y-o-Y on a normalised base (4-year annual growth at 5 per cent) is impressive in the context of a weak demand environment for most consumption categories.”

They believe the resilient growth in the past few quarters were aided by a stable tax regime and the government’s clampdown on illicit trade.

Revenue growth of other FMCG business was limited to 8.3 per cent due to subdued demand.

Motilal Oswal Research highlighted that the company also faces heightened competition from local and regional players like the other large FMCG companies, in the backdrop of commodity price deflation.

The growth in the segment was led by the scaling-up of power brands (Aashirvaad, Sunfeast, Bingo, Yippee!, Classmate and Mangaldeep), and the progress in adjacencies and future categories.
 

While ITC’s FMCG growth was soft, brokerages such as JM Financial Research pointed out that it was still better than most staples peers barring Nestle and Tata Consumer Products.

The segment margins expanded by 170 basis points Y-o-Y, while it was flat on a sequential basis at 8.3 per cent.

Led by good growth in room rates, revenues in the hotel business saw an uptick of 21 per cent Y-o-Y, and was up 1.5 times from levels in Q2FY20.

Occupancies moderated on a high base given a lower number of wedding dates in the September quarter and renovations which were planned earlier. The company highlighted that the demerger of hotels is progressing as per scheduled timelines. 

Most brokerages have cut their earnings estimates marginally to factor in the weak performance of the paperboards division. 

Commenting on the stock outlook, JM Financial Research expects it to stay muted in the near-term on the back of the weaker overall second quarter performance.

They believe ITC could potentially re-rate given a sharper capital-allocation strategy. ITC remains a preferred pick for the brokerage in the FMCG space.

Kotak Research, which has an add rating on ITC expects it to deliver a 9 per cent earnings growth in FY2023-26, led by 8-9 per cent segment profit growth in cigarettes in a stable tax regime scenario. 

BNP Paribas has cut its FY24-26 earnings by 1-2 per cent as it factors in a weak outlook of the paperboard division.

It offers an attractive dividend yield and its trailing price to earnings ratio is at an attractive discount to those of FMCG peers.

They maintain a ‘buy’ rating on the stock, which remains one of its top picks in the Indian consumer sector. 

ITC’s cigarette volume growth continues to outpace that of most FMCG companies, while its FMCG division’s growth remains at the top-end of its peer group.