FMCG major ITC reported below expected numbers due to higher than expected raw-material inflation. Overall recovery in cigarette business, which reached nearly pre-covid levels during 4QFY21, was significantly impacted (13%QoQ revenue decline) due to restrictions on store operation during the 2nd wave.

Progressive recovery in hotel business witnessed severe impact (44% QoQ revenue decline). Positively, demand in FMCG and Agri Business remained resilient. Inflationary raw material prices contributed towards gross margin contraction but operating profit remained healthy due to cost savings and judicious price hikes.

IDBI Capital has maintained 'Buy' rating on ITC with target price of Rs 275.

Key highlights and investment rationale

Business recovery supported by FMCG and Agri Business

Revenue grew 37%YoY on a lower base (1QFY21 revenue declined 21%YoY). Revenue from cigarettes grew 33% YoY while declined 13%QoQ due to 2nd wave led disruptions. Revenue from FMCG- Other segment grew 19%YoY on comparable basis driven by strong demand for essentials. E-commerce now contributes 8% to FMCG Other segment’s total revenue. Agri Business reported revenue growth of 9%YoY (4%YoY in 1QFY21) driven by zero-disruption in supplies to key customers despite significant operational challenge. Paperboard and packaging also reported healthy top line growth at 9%YoY. Hotel segment was most impacted (-56% QoQ) due to restrictions on mobility.

Inflation impacts gross margin; operating profit remains healthy

Gross Margin contracted 307bp YoY to 53% due to inflation in raw material prices. EBITDA margin expanded 298bp to 32.7% due to cost savings and price hikes. EPS grew 29%YoY to Rs 2.45.

Trim EPS estimate to factor-in inflation

We have factored in the impact of above expected inflation in our estimates. Accordingly, we have trimmed our EPS estimate for FY22E by 5%. We maintain FY23E estimates. Our ratings stand at BUY with SOTP based target price of Rs 275 implying a P/E multiple of 20x on FY23EPS.    

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