ITC’s Q2FY2022 performance was in-line with street expectation with revenue growing by 13.3% y-o-y to Rs. 13,553.5 crore and PAT growing by 14.4% y-o-y to Rs. 3,697.2 crore. Overall, operating profit margin (OPM) stood flat at 36.3% (improved by 357 bps q-o-q basis). Core cigarette business revenue grew by 10% (net revenue grew by 11.4%), driven by sales volume growth of 10%. Noncigarette FMCG business revenue grew by 2.9% y-o-y on high base of 15% growth in Q2FY21 (grew by 23% on two-year CAGR basis). EBIDTA margin of the non-cigarette FMCG business sustained at 10% despite raw-material inflation. Hotel business registered strong recovery with 3x improvement in hotel occupancy, while paperboard, paper, and packaging (PPP) revenue grew by 25% y-o-y during the quarter.
Cigarette business sales volumes are expected to improve in the coming quarters with easing of lockdown restrictions in most states. Management’s enhanced focus and redefined growth strategies have aided scaling up of the non-cigarette FMCG business margins. The stock is currently trading at 17.1x and 15.3x its FY2023 and FY2024 EPS, respectively, which is at a stark discount to some of the large consumer goods stock. Strong earnings visibility with improving growth prospects of the core cigarette business, margin expansion in the noncigarette FMCG business, and high cash-generation ability with strong dividend payout will reduce the valuation gap in the coming years. We maintain our Buy recommendation on the stock with an unchanged PT of Rs. 280.
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