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ITC stock lights up on margin surprise across segments in Q4

ITC's higher dependence on cigarettes business poses risk as ESG issues with respect to tobacco would weigh on valuation multiples.Premium
ITC's higher dependence on cigarettes business poses risk as ESG issues with respect to tobacco would weigh on valuation multiples.

  • For now, amid sharp inflationary pressures, ITC seems to be relatively better placed and is witnessing a recovery across segments. This reflects in the recent excitement for the stock, which has gained more than 25% so far this calendar year

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Shares of ITC Ltd. hit a fresh 52-week high of 279.25 apiece in opening deals on Thursday, a day when broader markets tanked. This jump in the company's shares was due to margin expansion across segments at a time when many consumer companies have been facing acute margin pressure due to higher costs.

For the March quarter (Q4FY22), ITC’s mainstay cigarette business saw 10% and 12% year-on-year (y-o-y) growth in revenues and earnings before interest and tax (Ebit), respectively. The segment accounted for as much as 82% of ITC’s segmental Ebit. What is more, volumes surpassed pre-pandemic levels. Analysts estimate Q4 cigarette volume growth at around 9%. However, on a three-year CAGR (compound annual growth rate) basis, volume growth has been muted at 1.3%, according to analysts at Motilal Oswal Financial Services.

ITC’s FMCG (fast moving consumer goods) segment’s Ebitda increased 22.5% y-o-y and margin grew 75 basis points (bps) despite cost pressures. Ebitda is earnings before interest, tax, depreciation and amortisation. One basis point is 0.01%. 

For instance, prices of edible oil surged nearly 31% year-on-year in the March quarter, according to the company. Ebitda growth was led by discretionary/out-of-home categories supported by increased mobility. The company said its hygiene portfolio faced demand volatility, with covid cases waning but revenue levels remained above pre-covid levels.

Other segments such as hotels saw sequential rise in average room rates but remained below pre-pandemic levels. While Ebit loss in Q4 narrowed on year, the business had reported a profit in Q3. Agri business recorded about a 30% surge in segment revenue led by wheat, rice, and leaf tobacco exports. Paperboard volumes touched new highs in the quarter.

Overall, net standalone revenue and Ebitda grew 16.8% y-o-y each to 15,531 crore and 5,224 crore, respectively. Ebitda margin was flattish year-on-year.

“ITC offers a combination of reasonable valuations, healthy dividend yield, and double-digit earnings growth over FY2022-24E led by recovery in cigarettes, hotels and steady/healthy performance in FMCG and paperboards," said analysts at Kotak Institutional Equities in a report on 19 May.

Even so, higher dependence on cigarettes business poses risk as ESG (environment, social and governance) issues with respect to tobacco would weigh on valuation multiples. As analysts from Motilal Oswal point out, longer term re-rating will be subject to diversification from cigarettes.

They added, “ITC’s re-rating would depend on sustained earnings growth going back to the high-teens levels witnessed in the first half of the last decade (at 18% CAGR) which had slowed down to 6.6% CAGR over the latter half of the decade."

For now, amid sharp inflationary pressures, ITC seems to be relatively better placed and is witnessing a recovery across segments. This reflects in the recent excitement for the stock, which has gained more than 25% so far this calendar year.

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