ITC Q3: Revenue short of expectations as cigarettes drag; hotels, FMCG outperform

Jefferies retained its buy call, but trimmed the target price to Rs 520 per share.

Brokerages remain largely positive on ITC despite the diversified cigarettes-to-hotels major’s December quarter revenue falling short of estimates on cigarettes and agri business’ below par performance.

Its hotels and FMCG arms performed better than expected when the company reported its third quarter earnings on January 29.

Total revenue from operations rose 2 percent to Rs 17,651.85 crore from the year-ago period. Prabhudas Lilladher had expected the company to report a revenue of Rs 17,700 crore.  The number also fell short of estimates of foreign brokerages such as Morgan Stanley, Jefferies and HSBC.

Profit, however, beat expectations, jumping 11 percent to Rs 5,183 crore.

A key reason for the top-line miss was the cigarette business, as volumes slipped 2 percent YoY as a result of a high base. Brokerages had projected cigarette volumes to expand up to 5 percent.Net revenue for the segment was up around 2.3 percent year-on-year.

Jefferies said the consolidation in the near-term volumes played out exactly like the company highlighted.

The premium segment did well but mass offerings underperformed, domestic brokerage Emkay Global said. “For Q4FY24, we are now building ~2 percent volume growth and see ~3 percent growth over FY25 and FY26. Positive volume growth outlook can be attributed to better execution, market share gains, and sustained innovation,” it said.

Brokerages do not expect tax shocks in the upcoming budget. The company has also been passing the tax hikes onto the consumer, which will lead to margin expansion, aiding high single-digit EBIT growth over FY 25-26.

HSBC said that ITC’s FMCG and others segment stood out with its 7.6 percent revenue growth and 100 basis points EBITDA margin expansion over last year.

The business delivered resilient performance amid slowdown in consumer demand, with staples, dairy, beverages, and homecare segments driving growth, HSBC analysts said.

The competitive intensity remained high in categories such as biscuits, snacks, noodles and popular soaps from local/regional players.

“Going ahead, while we see other FMCG growth in high single digits, profit is likely to be in mid-single digit, given cumulative PLI benefit in the base,” Emkay Global said.

As the demand improves, more local and regional players come into play in the FMCG segment and eat into the market share of  bigger players.

Also Read | ITC Q3 results: Net profit rises 11% to Rs 5,572 crore; interim dividend announced

Morgan Stanley said that the poor performance of the agri business weighed on the company’s topline. “Agri business should report a decline on a high base amid restrictions. Weakness in the paper business is likely to sustain in FY25,” Emkay said.

ITC Hotels reported better revenue than estimates, said Morgan Stanley. Hotels continued to report strong performance, reporting their best-ever quarter, with 18 percent sales and 57 percent EBIT YoY growth.

Its plan to demerge the hotels business had been cleared by the stock exchanges, the company said.

Factoring in the Q3 performance, Emkay Global cut its topline expectations by 3-4 percent over FY24-26E, which led to a 3-5 percent earnings cut. Jefferies retained its "buy" call, but trimmed the target price to Rs 520 per share.

ITC Q3

Nuvama Institutional Equities also cut its EPS estimates, leading to a revised price target of Rs 535, down from Rs 560 earlier, but it reiterated its "buy" call on the stock.