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Home / Markets / Mark To Market /  ITC’s recovery on track; sustaining it is crucial

In the recent months, there has been some excitement around the prospects of ITC Ltd’s cigarettes business. The expectation was that improved mobility and the easing of covid restrictions would help sales of cigarettes. Signs of this are visible. The company has said, cigarette volumes in the March quarter (Q4FY22) have surpassed pre-pandemic levels despite disruptions because of the Omicron wave. Analysts estimate last quarter’s cigarette volume growth at 9% year-on-year (y-o-y). Ebit (earnings before interest and tax) growth stood at 12%. Cigarettes are ITC’s mainstay, contributing 82% of the standalone segmental Ebit in Q4.

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There is optimism on growth ahead. “Cigarette volumes just about sustaining the pre-pandemic quarterly run-rate (Q4FY22 performance was much better) would itself mean around 3% volume growth for FY23E – we forecast +6-7% and estimate Ebit growth to be comfortably in double-digit," said analysts from JM Financial Institutional Securities Ltd in a report on 18 May. Further, in Q4, Ebitda (earnings before interest, tax, depreciation and amortization) margin in ITC’s fast-moving consumer goods (FMCG) segment grew by 75 basis points (bps) y-o-y despite cost headwinds. One basis point is 0.01%. This comes at a time when other FMCG companies have been facing margin pressure.

Meanwhile, with falling covid cases, ITC’s hotel segment is seeing increased occupancy. Average room rate increased sequentially but is still below pre-pandemic levels. While Ebit loss in Q4 narrowed y-o-y, the business had reported a profit in Q3. The agri business clocked about 30% revenue growth 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. Investors are visibly pleased with the recovery across segments. ITC’s shares rose 3.3% on Thursday, a day when the benchmark Nifty50 index fell by 2.65%.

The company has announced a final dividend of 6.25 per share, taking the full year dividend to 11.5 per share. “Dividend pay-out improves to about 95% while capex is near-flat y-o-y. This drives up return on equity to a seven year high of 25%," said analysts from Jefferies India.

In general, analysts reckon valuations of ITC stock are reasonable. ITC’s vast exposure to the cigarette’s business also means it is relatively better placed amid the sharp inflationary pressures vis-à-vis many other consumer companies. Even so, the higher dependence on cigarettes attracts ESG (environment, social and governance) concerns. Further, longer-term re-rating would also depend on the extent of diversification away from cigarettes. Hereon, sustained earnings growth would be key. So far in CY22, shares have risen by 26%, suggesting investors are factoring in the good news adequately, for now.

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