PL Stock Report: ITC (ITC IN) - Analyst Meet Update – Making right moves for sustainable growth - Accumulate

ITC (ITC IN) - Amnish Aggarwal - Head of Research, Prabhudas Lilladher Pvt. Ltd.

Rating: ACCUMULATE | CMP: Rs453 | TP: Rs492

Analyst Meet Update – Making right moves for sustainable growth

ITC’s Investor meet highlighted growth imperative led by broad based growth across business segments enabled by 1) Innovation 2) Efficient and agile supply chain 3) Digital/ smart ecosystem and 4) cost optimization. ITC continues to innovate and improve GTM initiatives even as cigarette business growth seems to be a function of taxation policy. ITC is aiming for 80-100bps margin expansion in New FMCG business led by premiumisation, scale and cost optimization. Hotels business is in for strong growth with huge scope to grow and rising ARR/occupancy. We found Food Tech and Nicotine derivative exports as two exciting businesses with a scope to create strong moats in long term. We continue to believe that FMCG and IT Services will create huge value for shareholders over the years.

We remain positive innovation and digitization led strategy with sustained growth and 100% jump in ROCE of non-cigarette businesses and overall Rs947bn cash generation in last 10 years. ITC trades at 24.9/22.9x FY25/FY26 EPS with ~3% dividend yield and 9.7% EPS CAGR over FY23-26. Maintain Accumulate with SOTP based target price of Rs492.

Key Highlights:

♦ Demand: Urban remains resilient however rural is still under pressure although some green shoots are emerging. Next two quarters to see better trajectory

♦ New FMCG – ITC is targeting 80bps-100bps margin improvement every year led by premiumisation (30/40bps), scale (20bps), 100bps over time in ICML, freight and cost optimisation

♦ Foods - New experience business/sunrise/noodles continue to see market share gain with current market share being 60%/53%(north east and WB)/20%. ITC sees huge opportunity in premium food product led by protein bar, yoga bar will be distributed with existing distributors network.

♦ Personal care remains challenging segment with difficult in scaling this business. Turnaround is likely in medium term with portfolio refresh & exploring new segments and innovations.

♦ Paper and Paperboard – The business is looking at capacity expansion and sustainable packaging, profitability should improve as pricing pressure due to Chinese dumping and low waste paper price seems over

♦ Hotels – ITC is poised for sustained growth given strong trends in ARR/ Occupancy, 20% capacity with less than 5-year linage, target to open 25 hotels in 2 years and target of 200 hotels with 18000 rooms with 2/3rd managed hotels.

♦ Agri Business – Agri business has identified Nicotine as a big export opportunity with huge demand supply gap and 50% contribution margin.

♦ ITC Infotech – ITC Infotech has 18-20% margins and bagged two big deals from BAT and PTC last year, Digitisation and emerging segments are likely to be key growth drivers while inorganic acquisitions will boost growth.

♦ Food tech – ITC’s pilot in Food tech segment under 3 brands of ITC Master Chef, Sunfeast Baked creations and Aashirvaad soul creations has been a success with more than 1mn orders in Bangalore. ITC has now entered Chennai market and plans to enter in other metros gradually.

♦ ITC is seeing good traction in digital channel/ MT/ in-house app with each contributing 16%/15%/6% to overall trade.

♦ Capex - ITC CAPEX is aimed at 1) innovation 2) new growth vectors 3) sustainable packaging & food tech 4) M&A. Management has guided an annual capex of Rs30-Rs32bn out which ~40%/~35%/25% to be utilized towards FMCG /Paper/ technology and Agri business

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