In the medium-term, the company is expected to benefit from strong industry-wide positive trends in its non-cigarettes businesses, particularly FMCG and hotels.
ITC’s Q4 FY18 result marks another quarter of an improving trend in its non-cigarettes business, led by double-digit underlying growth in the FMCG business and improving margin profile for both FMCG and hotels businesses. While the cigarettes business is gradually stabilising with improved margins, trading multiple for the stock remains at the lower end of FMCG sector valuation range.
Operational improvement in Q4
Table: Result snapshot
Scale up in FMCG business
Q4 topline was inline with our expectations. Revenue declined around five percent year-on-year (YoY) due to moderate decline (about two percent) in cigarette volumes, weak performance in the agri and paperboard business. The same was partially offset by improvement in hotels and FMCG (Others) businesses.
Cigarette business stabilising: Q4 FY18 marks the third consecutive quarter of volume decline on account of a steep increase in tax incidence due to rollout of the Goods & Service Tax (GST). Higher price for the legal cigarettes industry has impacted industry participants across the board. VST Industries, for instance, have been witnessing moderate volume growth. Its volume decline has been narrowing on a sequential basis. Margins in this segment have also improved by 41 bps sequentially.
FMCG: Underling growth in the company’s FMCG business is about 11 percent YoY (versus 12 percent YoY in Q3 FY18). Excluding Aashirvaad atta, which was impacted by the plastic controversy on social media, FMCG sales were up 12 percent YoY. On account of operating efficiencies and better product mix, operating margin expanded 134 bps sequentially. In major categories like premium biscuits and personal care, the company enhanced its market position. ITC’s lifestyle retailing business, however, remained sluggish.
Hotels: Margins in the hotels business rose 102 bps YoY (up 483 bps quarter-on-quarter) on better room rates, operating leverage and growth in food and beverages.
Agri-business: Growth in agri-business was weak due to drought in Andhra Pradesh and adverse quality of the tobacco leaf crop there. Its paperboard business was impacted by weak demand conditions in cigarette and liquor industry. However, margins improved YoY due to soft input cost and a favourable product mix.
ITC remains a value play
While the stock has recently rebounded from its technical support level of around Rs 258 per share, it is still about 20 percent off its 52 week high. With the stock currently trading near multi-year low multiples (29 time FY19e earnings), valuations are at a steep discount to industry leader Hindustan Unilever.
In the medium-term, the company is expected to benefit from strong industry wide positive trends in its non-cigarettes businesses, particularly FMCG and hotels. In both businesses, the company is well positioned in terms of scale and offerings. Improving profitability exemplifies the same trend.Moneycontrol Research page