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ITC’s Cigarette Volumes Declines Concerns on Permanent Loss of Business

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ITC’s cigarette volumes have recovered to pre-Covid levels allaying concerns on the permanent loss of business, Credit Suisse said in a report.

Credit Suisse said ITC’s cigarette volumes saw large declines during Covid as a large part of consumption is at workplaces and driven by mobility; both were constrained in the period.

As the post-Covid reopening panned out, cigarette volumes recovered. In 4Q FY21, cigarette volumes were back to pre-COVID levels.

“In our estimate, 4Q FY21 volumes grew 7.5 percent on a base quarter, which had seen 8 percent volume decline in 4Q FY20. This is despite many offices still not back to full strength, either followed full or partial work from home. This also provides assurance of no permanent loss of business in cigarettes due to Covid, contrary to the concern that some smokers could have quit permanently,” the report said.

“We remain positive on ITC as we see (1) strong cigarette recovery post the second wave of Covid-19 as consumer mobility recovers; (2) potential re-structuring leading to a re-rating; and (3) increasing value of the FMCG business with strong EBITDA improvements,” it added.

BNP Paribas said in a note that ITC declared a total dividend of Rs 10.75/share in FY21 (5 percent dividend yield) which is at the top end of that announced by Indian private sector companies.

“We see a potential for further dividend increase based on our expectation of a double-digit earnings CAGR over FY21-23. ITC paid out 100 per cent of its FY21 earnings, and we believe this can continue considering the 12 per cent cash as a per cent of market cap. We see ITC’s improving disclosure levels across divisions as a step in the right direction,” it added.

FMCG division had a strong year with 16 percent sales growth, and its margin improvement journey continued with the fourth consecutive year of 150bp plus margin expansion.

Agri-business reported a 54 percent increase in operating profit on higher sales led by wheat exports. Paper board reported a steady quarter with a 13 per cent increase in revenue and a stable margin. Hotels division reported a sequential recovery but its revenue remains well below pre-Covid levels, BNP Paribas said.

“We have cut our FY22 EPS estimates by 8 per cent to bake in near-term Covid drag on cigarettes business and higher losses in hotels; however, our FY23 EPS estimate remains largely unchanged. We are enthused with cigarette volume recovery/normalization, improved break-even in hotels (on much lower revenues) and structural uptick in FMCG revenues/margins. Low base and benign taxation bode well for strong recovery in H2; inexpensive valuation,” Axis Capital said in a note.


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