ITC shares fall after Q2 results; cigarette volumes still to recover, FMCG sales thrive

ITC Ltd was among the handful of 30 Sensex shares trading in red on Monday morning. ITC Ltd share price was down 0.75% at Rs 172.7 per share. Cigarettes-to-hospitality major ITC reported its July-September quarter results on Friday which saw the company’s profits drop on-year basis to Rs 3,232 crore. ITC reported higher expenses than last year. Cigarette business of ITC continued to record muted performance while FMCG segment was the White Knight in the second quarter of this fiscal year. Shares of ITC are down 27% year-to-date.

ITC’s cigarette segment sales declined 14.4%, with a volume decline of 12% during the quarter. “The recovery has been slower than expected due to localized lockdowns and slow recovery in key markets which has impacted both mix and realizations as well,” brokerage and research firm Emkay Global said in a note.  Revenue from the cigarette business was down to Rs 4,327 crore from Rs 5,113 crore in the same period last year. Company’s management remains hopeful that the volumes will return to pre-covid levels soon.

Hospitality business continued to suffer in the quarter with revenue of just Rs 82 crore against Rs 426 crore in the same period last year. “ Hotels had another washout quarter with revenue down 81%; leisure locations are now seeing demand uptick, though,” said JM Financials. Agriculture related business of ITC recorded a strong year-on-year growth. Revenue from the agricultural sector was up Rs 2,985 crore against Rs 2,647 crore last year. “ The segment posted strong sales growth of 13% driven by trading opportunities in rice, mustard and coffee and higher wheat supplies for Aashirvaad Atta,” said Systematix Institutional Equities.

FMCG sales were up 15% on-year basis. “FMCG performance is best among peers with margin improvement beating expectations,” Emkay Global said. Staples, Convenience Foods and Health & Hygiene products, which account for 75% of the product portfolio in the segment, grew 25% during the quarter. We estimate that the Sunrise acquisition will add another Rs 600-700 crore to revenues and will be margin accretive, they added.

“With continued m-o-m recovery, cigarette EBIT should see steady growth from Q4. Valuations remain attractive with the cigarette business at less than 10x FY22E EPS,” Emkay Global said while giving a ‘Buy’ call on ITC with a target price of Rs 250 per share. Analysts at Systematix Institutional Equities too have a target price of Rs 250 and a ‘Buy’ call on ITC adding that valuations remain attractive. JM Financial noted that the stock is too cheap to ignore while they pinned a target price of Rs 270 on ITC shares.