Appointment of Sanjiv Puri, the current MD, as the Chairman takes away any worries with respect to succession planning, in our opinion.
ITC’s Q4 operating sales grew 13.3 percent YoY (year on year), buoyed by strong top line growth across segments. A key takeaway is better than expected volume growth in the cigarette business, which is estimated at 7-8 percent.
EBITDA margins, however, contracted by 103 bps on account of higher cost of goods sold and rise in employee costs.
Segmental margins in cigarette and hotels businesses were lower than last year while there was a significant improvement in margins for FMCG (others) and paperboard business. The company highlighted that FMCG (others) EBITDA margin is 7 percent as against 5.7 percent in Q4 FY18 – still a long way off the frontline FMCG benchmarks, but fast improving.
While net profit has grown nearly 19 percent, this includes a net gain on restructuring of the Lifestyle retailing business, consisting of sale proceeds of John Players trademark/copyright amounting to Rs 70.5 crore.
Table: Q4 Financials
Table: Segmental performance
While cigarette volume trend is better than anticipated, a possible downtrading needs a close watch since the recovery is in a fragile phase. Also, we take solace from the fact that the fiscal/taxation side of the cigarette business has likely stabilised.
We believe that the thesis of broadening of growth levers for ITC is unfolding as expected. A few of ITC’s other businesses have witnessed encouraging growth traction in recent times: volume play in the FMCG business and growth outlook in the hotel and paper segment. We are enthused about the operating leverage playing out for FMCG division in particular.
Additionally, appointment of Sanjiv Puri, the current MD, as the Chairman takes away any worries with respect to succession planning, in our opinion.
Further, the stock at 24.5 times FY20 estimated earnings is trading at a significant discount to the FMCG sector’s trading multiple (~40x). Given this context, we remain constructive on the stock.
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