Why ITC makes better play than other FMCG companies? We explain

ITC witnessed 3.5% YoY revenue growth to ₹177 billion in Q3FY23 led by an uptick in cigarettes, FMCG – others, hotels and paper and paperboards, while the agriculture business was adversely affected by the ban on wheat and rice exports. In the FMCG – others segment, revenue and EBITDA grew 1.5x and 1.9x respectively over Q3FY20.

Consolidated EBITDA margin expanded 480 basis points (bps) YoY to 35.5% amidst elevated commodity prices. Adjusted PAT grew 23% YoY to ₹50 billion with margin expansion of 460 bps. The company announced interim dividend of ₹6/share.

Overall revenue (ex-agri business) growth was led by continued strong performance in cigarette (17% YoY, ~15% YoY volume growth, 11% 3-year CAGR) followed by resilient FMCG (18% YoY, 13.5% 3-year CAGR) and paper business (13% YoY, 14% 3-year CAGR).

The cigarette business highlights

(1) Volume recovery from illicit trade on the back of stability in taxes and deterrent actions by enforcement agencies,

(2) Recent launches gaining traction with enhanced product portfolio mix. ITC has also strengthened its product portfolio with new launches and premiumisation across segments.

Cigarettes EBIT was up 17% YoY to ₹46.2 billion, highest in a quarter.

FMCG profitability improves

FMCG revenues grew 18% YoY. The management also highlighted that FMCG witnessed strong growth:

(1) in both staples and convenience foods along with discretionary and out-of-home categories,

(2) across channels and markets driven by ramp-up in outlet coverage (both in urban and rural). The hygiene portfolio saw weakness but was still above pre-Covid levels.

Segment EBITDA margins was up 90 bps YoY to 10% led by premiumization and cost efficiencies. RM inflation remains elevated while some commodities witness sequential decline in prices.

Hotels business

Revenue from hotel segment grew at healthy 50.5% YoY (9% 3-year CAGR).

Good broad-based demand along with higher ARR (ahead of pre-pandemic level) was driven by:

(1) Normalised domestic travel with inbound foreign travel witnessing pickup,

(2) Occupancy demand for special occasion, wedding, festive, retail package and leisure.

The highlight was the marked improvement in profitability – EBITDA margin expanded to 31.5%.

We note that ITC has been driving structural cost savings in this business.

Paperboards and agri

Paperboards segment also had a good quarter with revenue growth of 13% YoY and a strong EBIT margin print of 26%.

Agri-business witnessed pressure with the impact of restrictions imposed on wheat and rice exports by the government during the year with revenue declining 37% to ₹31.2 billion, however, strong growth in high value added agri-products and leaf tobacco led to absolute EBIT growth of 33% YoY.

In conclusion…

With a stable outlook for the cigarette volume growth (led by market share gain from illicit trade along with new product launches), the FMCG business reaching the inflexion point (as its EBIT margins are expected to inch up from 7.7% in FY22), strong and stable growth witnessed in hotels, and steady and decent performance outlook in paperboard and agribusiness, ITC makes a better play in the entire FMCG family where valuations of other players stand elevated.

Shuchi Nahar is a Certified Research Analyst. She can be found on Twitter at @shuchi_nahar

Note: This article is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related investment-related decision.