ITC share price: Sharekhan says BUY, pegs target at Rs 265

ITC registered mixed performance in Q4FY2021 with revenue growing by 24% (boosted by 79% growth in agri-business), while OPM was down by 486 bps to 31.6% due to change in revenue mix and lower profitability in the hotel business. The cigarette business’s net revenue (excluding the excise duty) grew by 6.7% yoy with volume growth of 8% (versus volume decline of 7% in Q3 and 12% in Q2). Sharekhan says maintain Buy on ITC with a revised price target of Rs 265

ITC has worked on supply efficiency to maintain products available on retail shelves. Improving penetration of key categories, higher rural demand, and strong traction to new launches: Reuters

ITC registered mixed performance in Q4FY2021 with revenue growing by 24% (boosted by 79% growth in agri-business), while OPM was down by 486 bps to 31.6% due to change in revenue mix and lower profitability in the hotel business. The cigarette business’s net revenue (excluding the excise duty) grew by 6.7% yoy with volume growth of 8% (versus volume decline of 7% in Q3 and 12% in Q2). Sharekhan says maintain Buy on ITC with a revised price target of Rs 265.

Sharekhan says that Agri business performance was the highlight of the quarter with revenue growth of 79%, driven by strong export opportunities in low margin commodities such as wheat, rice, and oilseeds and good recovery in the leaf tobacco business. Hotel business also posted sequential improvement with revenue recovery to 62% of pre-COVID level in Q4 and posted EBITDA of Rs 25 crore (fixed cost was cut by 41% in FY2021). Despite disruption in H1FY2021, ITC managed to end the year with revenue growth of 4%, led by sustained double-digit growth in non-cigarette FMCG business, strong recovery in cigarette business sales in H2FY2021, and agri business posting robust performance in Q4.

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Sharekhan expects ITC cigarette sales volume to be affected by limited shop hours in key states in Q1 (but will be higher on a yoy basis as cigarettes shops were not allowed to operate during nationwide lockdown in Q1FY2020). With no hike on cigarettes in the Union Budget, we do not expect any price hike in the cigarette portfolio, which will help cigarette sales volume to improve in the subsequent quarters with expected improvement in the mobility with easing of lockdown restrictions.

Further, ITC has worked on supply efficiency to maintain products available on retail shelves. Improving penetration of key categories, higher rural demand, and strong traction to new launches (120+ new products launched in FY2021) would help the non-cigarette FMCG business to report good growth momentum in the near to medium term. Margin expansion of the non-cigarette FMCG business would sustain, with scale up in revenue of products/categories and better revenue mix.

ITC Key positives:

Agri business revenue grew by 79%, driven by export opportunities in wheat, rice, and oilseeds. Š Hotel business recovered to 62% and EBITDA stood at Rs 25 cr, led by strong reduction in fixed cost (down by 41% yoy)

Non-cigarette FMCG business margin improved by 180 bps in FY2021 (improved by 490 bps over three years)
Cigarette business volumes recovered to pre-COVID level in Q4; EBITDA margin improved by 70 bps yoy

ITC Key negatives:

ITC’s OPM was down by 486 bps to 31.6% due to change in revenue mix

ITC Key Risks:

Any increase in tax on cigarettes or government implementing policies to curb tobacco products consumption or any disruption in consumer demand due to frequent lockdowns would act as key risk to Sharekhan's earnings estimates

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