FMCG major ITC  reported below expected result. Cigarette business witnessed healthy recovery with exit volume during the quarter reaching pre-covid levels. FMCG business delivered resilient performance on a high base. Staples and convenience food witnessed moderation in demand on a high base.

Demand for hygiene portfolio declined in-line with lower intensity of the pandemic. Closure of educational institution impacted demand for ESPB business. In hotel business; occupancy levels improved significantly (3x YoY) thereby turning EBITDA positive during the quarter. Impact of inflation on gross margin has been moderate while EBITDA margin remained stable due to lower other expenses (as % of revenue).

"As per revised outlook on raw material inflation; we have trimmed our EPS estimates by 3-4% during FY22-23E. We have introduced FY24E in our estimates. Our revised TP based on SOTP valuation stands at Rs 299 (vs previous TP of Rs 275). We maintain BUY rating," stated IDBI Capital Equity Research.

Key highlights and investment rationale

Demand picks-up across segments; cigarette exit volume reach pre-covid levels

Revenue (ex-agri business) grew 12%YoY driven by resilient performance of FMCG (+23% vs 2QFY20) due to sharp re-bound in out-of-home consumption. Cigarette business grew 10%YoY driven by strong recovery across all regions with exit volumes at pre-covid levels. Occupancy in hotel business improved by 3x YoY as business travel gathers momentum while leisure destination continues the growth momentum. Paperboard and packaging segment revenue grew 25% aided by revival in demand across end-user segments.  Revenue contribution from e-commerce stands at 7%.

Inflation impacts gross margin; operating profit remains stable

Gross Margin contracted 42bp YoY to 57% due to inflation in raw material prices. EBITDA margin remained flat at 36% due to lower other expenses. EPS grew 14% YoY to Rs 3.

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