ITC Ltd. K shares hit new 52-week high 279.25 in opening deals on Thursday, a day when broader markets declined. The jump in the company’s shares was due to margin expansion across sectors at a time when many consumer companies are facing intense margin pressure due to higher costs.
For the March quarter (Q4FY22), ITC’s core cigarette business witnessed 10% and 12% year-on-year (Yoy) growth in revenue and earnings before interest and tax (Ebit), respectively. This segment accounts for 82 per cent of ITC’s segment Ebit. What’s more, the volume exceeded pre-pandemic levels. Analysts estimate Q4 cigarette volume to increase by about 9%. However, on a three-year CAGR (compound annual growth rate) basis, volume growth has been muted at 1.3%, according to analysts at Motilal Oswal Financial Services.
Despite cost pressures, ITC’s FMCG (fast moving consumer goods) segment’s EBITDA grew 22.5% year-on-year and margins grew 75 basis points (bps). Ebitda is earnings before interest, taxes, depreciation and amortization. One basis point is 0.01%.
For instance, according to the company, edible oil prices increased by about 31% year-on-year in the March quarter. Ebitda growth was led by discretionary/out-of-home categories supported by increased mobility. The company said its sanitation portfolio faced volatility in demand, with Covid cases declining, but revenue levels above pre-Covid levels.
Other areas, such as hotels, saw a gradual increase in average room rates, but remained below pre-pandemic levels. While the Ebit loss in Q4 decreased over the year, the business had reported a profit in Q3. Agribusiness registered nearly 30% growth in segment revenue due to wheat, rice and leaf tobacco exports. Paperboard volumes touched new highs in the quarter.
Overall, net standalone revenue and EBITDA grew by 16.8% each 15,531 crore and 5,224 crores respectively. Ebitda margins remained flat year-on-year.
Analysts at Kotak Institutional Equities said in a report, “ITC offers a combination of fair valuation, healthy dividend yield and double-digit earnings growth in FY 2022-24E on account of stable/healthy performance in Cigarettes, Hotels & FMCG and Paperboard. is.” on 19 May.
Nevertheless, over-reliance on the cigarette business poses risks as ESG (environmental, social and governance) issues with respect to tobacco will weigh on the valuation multiples. As analysts at Motilal Oswal point out, long-term re-ratings will be subject to diversification from cigarettes.
He further added, “The re-rating of ITC will depend on sustained earnings growth going back to the high-teens level seen in the first half of the last decade (at 18% CAGR), which slowed to 6.6% CAGR in the subsequent half.” It was a decade.”
For now, amidst intense inflationary pressures, ITC is in a relatively better position and recovery is being seen across sectors. This reflects recent enthusiasm for the stock, which has gained more than 25% so far this calendar year.