Motilal Oswal 's research report on ITC
ITC reported higher-than-expected sales growth (mainly due to better-than-expected agriculture business resilience) in 1QFY21. However, EBITDA and PAT were disappointing due to (a) estimated 37% cigarette volume decline, (b) far lower contribution of the highly profitable cigarette business to total sales (32% in 1QFY21 v/s usual levels of ~40%), and (c) massive losses in the hospitality business (~8% negative impact on EBITDA in 1QFY21 v/s 1% usual positive contribution). Our channel checks indicate that cigarette volumes are close to pre-COVID levels. However, re-imposition of lockdowns in a few states could have some negative effect. Nevertheless, it is unlikely for the (a) weak mix in 1QFY21 (low cigarette proportion to total sales) to be repeated, and (b) impact on margins to be as sharp as in 1QFY21.
Further, outlook for the hotel business is still extremely hazy, which should lead to some profitability impact. Target multiple of 15x Jun’22E EPS is at ~30% premium to global tobacco majors. We maintain Neutral on the stock.
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