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Last Updated : Jan 23, 2019 09:34 PM IST | Source:

ITC Q3FY19 review: Operating slowdown in cigarette biz offset by others; accumulate

We believe that the thesis of broadening of growth levers for ITC is unfolding as expected. ITC’s Non-Cigarettes businesses have witnessed encouraging growth traction in recent times.

Anubhav Sahu @anubhavsays
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ITC’s Q3 operating sales grew 14.9 percent year-on-year (YoY) led by double-digit growth in non-cigarette businesses. While the paperboard business witnessed ramp-up in the utilisation of its recently-commissioned facilities, the hotels business posted seasonal uptick.

Earnings before interest, tax, depreciation and amortisation (EBITDA) margins improved sequentially as operating leverage played out for FMCG and hotels businesses. Net profit, on like-for-like basis was up 13.8 percent YoY.

Table: Q3 Financials


Source: Company

Key positives

The quarter under review underpins improving trend for its non-cigarette businesses. On YoY basis, hotels, paperboards and FMCG segments moved from strength to strength. FMCG sales grew 11.5 percent (HUL: 13 percent YoY) on performance in atta, snacks, premium cream biscuits and noodles, fragrancing products, personal care products and classmate notebooks.

Segment EBITDA grew 42 percent YoY on account of a favourable product mix, economies of scale, cost savings offsetting investment behind brands and gestation costs for new categories.

Hotels business witnessed a steady improvement in sales with operating leverage playing out in the seasonal month. Operations at the recently commissioned hotels i.e. ITC Kohenur (commissioned in Q1 FY19) and ITC Grand Goa (commissioned in October'18) were scaled up. Further, the company updated on steady progress in the construction of ITC Hotels at Kolkata & Ahmedabad and Welcom Hotels in Amritsar, Guntur & Bhubaneswar.

Paperboards business also had a healthy sequential improvement in sales aided by strong demand in value-added paperboard and decor segments. Capacity utilisation of the recently-commissioned Decor machine (Tribeni unit) and paperboard machine (1.5 lakh tonnes capacity at Bhadrachalam unit) was scaled up during the quarter. Operating margin improvement of 56 bps YoY was aided by improved pulp yield and product mix.

Table: Segmental performance


Source: Company

Key negatives

While Cigarette business witnessed volume growth of 6-7 percent on a base of -4 to -5 percent in Q3 FY18, there was a moderation in cigarette business operating profit margin (-109 bps QoQ). ITC attributed this to twin impact of higher raw material cost (higher cost leaf tobacco crop) and an adverse product mix.

In the case of the agri business, revenue opportunities in the value-added portfolio (Coffee, Spices and Aqua) was offset by the subdued demand for leaf tobacco in the international business. Further, leaf cost escalation continued to weigh on profitability.

Other observations

The company expanded its fresh dairy business footprint with the launch of `Aashirvaad Svasti' milk and dahi in Kolkata. Here, the company benefits from the sourcing network of its agri business division. Further, the company launched a series of milk-based shakes and nut shakes in the select markets.

In the branded packaged foods and personal care businesses, the company continued to augment capacities. While the capacity utilisation at Trichy plant (commissioned in Sept'18) was ramped up; in Kapurthala, new production lines for juices/milk-based beverages were commissioned in the last quarter.

Additionally, the company’s recent launch of a range of frozen snacks products under ITC Master Chef are being scaled up.


While Cigarettes volume trend is as anticipated, a possible trend for downtrading needs a close watch as the recovery is in a fragile phase. Having said that we take solace from the fact that the fiscal/taxation side of the cigarettes business has likely stabilised if the recent GST meets are any indication.

We believe the thesis of broadening of growth levers for ITC is unfolding as expected. Few of ITC’s other businesses have witnessed encouraging growth traction in recent times: volume growth in the FMCG business and growth outlook in the hotel and paper business. Further, stock (24.5 times FY20 estimated earnings) is currently trading at a significant discount to the FMCG sector’s trading multiple (~40x) and sector leader HUL (46x). Given this context, we remain constructive on the stock.

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First Published on Jan 23, 2019 09:33 pm
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