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ITC -- Time for a re-rating

ITC's plan to distribute around 80-85 percent of its earnings as dividends in the medium term is a positive for valuation

-Results above Street expectation
-FMCG excluding cigarettes saw double digit growth with higher margins
-Market share increased in most categories
-Hotel and paper business hit due to lockdown
-Valuation inexpensive, higher dividend payout to support valuation

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ITC’s (CMP: Rs195.45;) quarterly results were above Street expectations. Cigarette volumes have declined by around 35 to 40 percent as against expectations of a  decline of 30-35 percent.  A shut down of manufacturing operations in April, along with a price hike of around 8 to 10 percent in order to mitigate the increase in taxation, led to some volume decline.

Revenues shrank by 21 percent year on year on the back of a decline of 92 percent in the hotel segment, 33 percent in the paper business and 30 percent in cigarettes. Fast Moving Consumer Goods (FMCG) excluding cigarettes grew 10 percent year on year.

EBIDTA (Earnings before Interest, Depreciation, Tax and Amortization) for the June 2020 quarter were down by 42 percent year on year mainly because of lower revenue growth and lower gross margin while other expenses were lower by 15 percent year on year.

Net profit after tax fell by 26 percent year on year,  aided by a lower effective tax rate which stood at 25 percent in June quarter as compared to 34 percent in the year ago quarter.

Segmental performance:

Cigarette business-can the mojo come back?

Cigarette revenues saw a decline of 30 percent year on year because of the shutdown in manufacturing activities for almost 45 to 50 days. However, production was ramped up as soon as permission to start manufacturing operations was received and subsequently the company strengthened the supply chain. Currently, all factories are operational and production has been scaled up to pre-Covid levels. Also the sales and distribution operations have been largely normalized. Due to the sealed international border, there was a significant reduction in imported cigarettes. ITC’s two key competitors faced multiple headwinds and were not able to continue manufacturing operations. Thanks to ramping up production and lack of competition, ITC was able to gain market share.

ITC introduced various variants in the regular sized filter and double size filter segment. In order to capture the young millennials who prefer loose cigarettes, ITC introduced The Flake brand in an innovative 5 stick pack as compared to the usual 10 stick pack in some target markets.

FMCG-Others-Double digit growth along with margin expansion

FMCG revenue grew by 19 percent year on year (excluding life style retailing and educational and stationery products) while segment EBIDTA grew by 42 percent year on year at Rs 257 core with operating margin expanding by 170 basis points.

Source - Moneycontrol.com
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