Moneycontrol PRO
Check Credit Score
Check Credit Score
HomeNewsBusinessEarnings

ITC Q1: Slack demand dents cigarette volume; better operating leverage key positive

August 05, 2019 / 10:09 PM IST
(Image: Reuters)

(Image: Reuters)

 
 
live
  • bselive
  • nselive
Volume
Todays L/H
More

Moneycontrol Research

Highlights:


- Cigarette volumes lower than expected; improved margins reflect recent price hikes
- FMCG business benefits from restructuring, operating leverage and mix
- Hotel performance in line with sector-wide promising trend- Operating leverage and stable cigar tax regime should help reduce valuation discount to the sector

ITC’s Q1 FY20 sales growth of 5.8 percent YoY (year on year) was lower than our expectations, but broadly in line with the traction seen for the FMCG sector. While volume growth for cigarettes was uninspiring, improved operating performance for cigarettes and FMCG segments was noteworthy.

Table: Q1 Financials

Capture

Source: Company

Key positives

Volume growth in the cigarette businesses (39 percent of Q1 sales) is estimated to be in the vicinity of 3 percent. Though this comes after a decent volume growth (7-8 percent) in the previous quarter, it signals weak traction on the demand side. However, what comes as a positive surprise is cigar operating margin has expanded by 140 bps YoY, helped by price increase to the tune of 2.5 percent. Note that margin contraction was a key concern in the previous financial year amid trend for downtrading among consumers.

FMCG sales (22 percent of total sales) grew by 8 percent YoY after excluding the impact of restructuring of Lifestyle retailing. The company highlighted that FMCG EBIT witnessed a strong move of 56 percent YoY, led by better product mix and operating leverage.

Hotels business (3 percent of sales) witnessed another strong quarter (growing 15 percent YoY) benefiting from traction in new properties (ITC Kohenur, Hyderabad, ITC Royal Bengal and ITC Grand Goa). However, additional deprecation on account of new properties impacted the segment’s earnings before interest expense and tax (EBIT).

Overall, EBITDA margin expanded by 105 bps YoY, aided by strong execution, restructuring and gross margin expansion (+180 bps).

Key negative

Though agribusiness sales expanded by 15 percent YoY, EBIT margin declined by 60 bps. The segment was impacted by weak trading opportunities in oilseeds and pulses and subdued demand for leaf tobacco in international markets.

Outlook

Cigarette volume growth moderated in the current quarter though improved operating performance was noticeable. As the cigarette business still contributes a major chunk of operating profit, it remains a segment to watch amid consumer demand slowdown and the competitive intensity.

Having said that, we believe that the thesis of broadening of growth levers for ITC remains on track. A few of ITC’s other businesses have witnessed encouraging traction in recent times: volume growth in the FMCG space and outlook in the hotel and paper business.

We are particularly enthused about operating leverage playing out for FMCG business. A back of the envelope calculation suggests that a normalisation of ITC’s FMCG business margins in line with its peers could help the conglomerate's overall EBITDA margin looking up ~250 bps, ceteris paribus.

Pls also read: ITC’s hospitality forays – the less talked about business interest of tobacco/FMCG giant

Furthermore, the stock (20 times FY21 estimated earnings) is trading at a significant discount to the FMCG sector’s trading multiple (~35-40x). We believe that this discount should narrow, given the stable tax regime for the cigarettes business and improving operating leverage in other businesses.

Follow @anubhavsays

For more research articles, visit our Moneycontrol Research page

Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here

Anubhav Sahu is Principal Research Analyst, Moneycontrol Research. He has been writing research/recommendation pieces on Chemicals and Pharma sectors along with Equity strategy themes. He has previously worked with Credit Suisse and BNP Paribas.
first published: Aug 5, 2019 05:16 pm

Discover the latest business news, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!

Advisory Alert: It has come to our attention that certain individuals are representing themselves as affiliates of Moneycontrol and soliciting funds on the false promise of assured returns on their investments. We wish to reiterate that Moneycontrol does not solicit funds from investors and neither does it promise any assured returns. In case you are approached by anyone making such claims, please write to us at grievanceofficer@nw18.com or call on 02268882347