Buy ITC; target of Rs 236 HDFC Securities

HDFC Securities research report on ITC

ITC delivered a mixed bag result in a challenging environment. Most OOH consumption categories were impacted in 2Q, and the cigarettes category was not left out. Cigarette net revenue/vol/EBIT clocked -14/-12/-16% growth as compared to our expectation of -8/-10/-8% YoY. FMCG revenue growth was at 15% (HSIE 12.5%), better than Nestle/Britannia (10/11% YoY). EBIT/EBITDA margin was at 6.7/9.7% (HSIE 3.6/7%). Localised lockdowns impacted the recovery in August to mid-Sep for cigarettes, which was witnessed in JuneJuly. Key markets like Karnataka, Maharashtra, and Tamil Nadu were weak with COVID impact. Cigarette mix was also unfavourable and impacted margin. Volume recovery at the end of the quarter is a positive sign. FMCG continues to shine, and ITC is capitalising the high demand for health, hygiene and packaged food products.

Outlook

We cut our EPS estimate for FY21 by 3% while maintaining it for FY22/FY23. We value ITC on SoTP and maintain target price at Rs 236 (implied P/E of 18x P/E Sep-22E EPS). Maintain BUY.

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