Reduce ITC; target of Rs 187: Dolat Capital Market

Dolat Capital Market's research report on ITC

ITC’s Q2FY21 revenue and APAT came ahead of our estimates. The Cigarette business posted ~3.9% YoY de-growth, vs est of 5% decline. Our analysis suggests 10%+ volume decline in cigarette business. A 880bps decline in margin in the Cigarette business indicates that the product mix was unfavorable and economy brand contribution must have increased during the quarter. Significant increase in duty has resulted in widening of price gap between ITC and smuggled cigarettes. We believe that this would continue to pressurize volume growth going ahead. FMCG business exhibited strong performance with 15.4% revenue increase and 390bps margin expansion. We have upward revised our FY21E and FY22E EPS estimates to Rs 11.0 (+3.9%) and Rs 12.7 (+5.7%) to factor in Q2 performance and introduced FY23E EPS at Rs 13.6.

Outlook

Though the stock is trading at a steep discount to other FMCG peers, we believe that the stock would remain under pressure. Therefore, we maintain Reduce with TP of Rs 187.