ITC (NS:ITC) and all other major FMCG scrips jumped Friday (14th May); ITC closed around 212.25, soared almost +4.43% as it may be a partial beneficiary of India’s COVID lockdowns like all other FMCG companies. Higher consumer demand for FMCG/essential/grocery products in COVID partial/full lockdowns is good for ITC, while lower demand for cigarettes in WFH mode (lockdowns) is negative to some extent. Also, ITC’s luxurious hotel business may suffer as consumer-facing travel/tourism as hotel/leisure business (service industry) is among the worst affected sector in COVID mitigation protocols. Almost 45% of ITC’s revenue comes from cigarettes and tobacco leaves, while 4% generates from hotel business; almost 30% comes from FMCG business. ITC is a domestic savvy company as around 90% of revenue comes from Indian operations. 
Over the last decade, ITC has changed itself from a cigarette-only company to a major FMCG house through a deluge of organic and inorganic diversifications/expansions. ITC’s strength lies in its pan-India distribution network of cigarette dealers. Initially, ITC leveraged its cigarette business monopoly to virtually force its cigarette dealers for various FMCG products offtake and formed a base. Now, with various leading and trusted FMCG brands in packaged foods (Atta, biscuits, snacks, confectionery, and ready meals), personal care products, ITC are a major FMCG house in India and less affected on various regulatory hurdles for its cigarette business.
Although a nominal number of cigarette sales may be declining, a steep price hike (even after higher taxes) ensured robust revenue and EBITDA margin; for an addicted common smoker, exorbitant cigarette price is not an issue at all. They are buying every day in loose sticks rather than a packet once a week. In lockdowns, nowadays, cigarettes are also available in normal grocery shops. Apart from tax hikes and various regulatory/legal hurdles, ITC’s cigarette business was also affected in the last few years due to smuggled low-cost cigarettes.
The FMCG sector has seen strong growth momentum in H2FY21 on the back of a consumption shift in key categories from the unorganized to the organized sector; i.e. from so-called ‘Kirana stores’ to departmental/mall stores, especially to online ones during difficult COVID lockdown periods. The market is now expecting ITC’s FMCG revenue may grow around 15% sequentially (q/q) in Apr’21 QTR. ITC as-well-as almost all the FMCG companies have also increased prices of some of its products due to higher raw material costs and this has been absorbed by the consumers without any major issues; i.e. FMCGs have now pricing power.
But ITC’s cigarette business (revenue) may slip -5% due to more WFH trends in Q1FY22. But in Q4FY21, ITC’s operating revenue may grow by around +9% with some gain from cigarette business; favourable/lower base effects for Mar’20 may also help. In Q4FY21, Cigarettes demand was driven by the opening up of physical offices and public transport. The foods category continued to do well however biscuits may have witnessed some slowdown. Foods business growth was driven by Yippee instant noodles, Aashirvaad Atta, ITC Master Chef frozen snacks and Bingo among others. There was a visible improvement in offtake of personal care products with the ease of lockdown and increase in out-of-home/personal mobility. Also, ITC’s COVID sanitiser product Savlon is now a household name.
Overall, for the FMCG companies, online purchase of food products/grocery items, vegetables, fruits, and also personal care products have jumped by over +40% in April-May’21 as over 50% of India is now under almost full lockdown and rest partial lockdown amid ongoing COVID tsunami. Looking ahead, this state of full/partial lockdowns may extend well into FY22 due to India’s tepid progress of COVID vaccinations and policy flip-flops. And combing this with COVID scarring, the present trend of higher demand for essential items (grocery and medicines) may continue. ITC, as a major FMCG house, may also benefit.
In Q3FY21, ITC’s operating revenue grew by around +7.43% sequentially (q/q) and +5.78% yearly (y/y), while core operating profit (EBTDA) surged +8.77% sequentially and slips -4.04% yearly. In Q3FY21, revenue was helped by grocery items (staples, convenience foods, and health & hygiene products) as well as discretionary/out-of-home products and hotels. But education and stationery products business continues to suffer due to the impact of the closure of educational institutions. Savlon disinfectant spray clocked record sales amid COVID scarring.
ITC said strong Q3FY21 non-cigarette performance was driven by higher operating leverage, enhanced operational efficiencies, portfolio premiumization, and product mix enrichment, notwithstanding incremental operating costs due to Covid-19 and gestation costs of new categories/facilities. ITC also used digital platforms extensively to reach customers/dealers quite extensively. In 2020, ITC undertook several steps in expanding/improving its food products/grocery items as well as cigarette portfolio.
For the Hotel business, ITC said:
HOTELS
Segment Revenue witnessed progressive recovery with improvement in Room and F&B business. Turned EBITDA positive in December’20 and break-even for the quarter: Wedding business, staycations/motorable getaways were the key drivers besides healthcare/quarantine-related business. Leisure destinations turned in a strong performance reflecting the continuing trend of short getaways with hill stations, Rajasthan and Goa leading the charts.
New F&B initiatives received excellent response. Home delivery/takeaway offerings augmented with the introduction of 'Biryani & Pulao Collection' comprising timeless flavours of classic culinary dishes from across the nation. Rev-Par improves across business locations; however, remains below pre-Covid levels. Aggressive cost reduction measures led to a ~44% reduction in controllable cash fixed costs.
Looking forward, ITC may expand its FMCG portfolio by launching chocolates (‘Fantastik’ brand), staples (rice and pulse under the Aashirvaad brand. ITC has already expanded its Savlon portfolio last year with the launch of Savlon Hexa Advanced soap, body and hand wash along with multipurpose disinfectant spray and floor cleaner.
Fair Valuation: ITC
Considering all the pros & cons of India’s COVID trajectory for ITC (positive for FMCG business, negative to neutral for cigarette and hotel business), in Q4FY21, ITC may report an operating core EPS around 4.07 and TTM core operating EPS (FY21) around 13.90 against FY20 actual figure 15.62. Assuming an average 15% CAGR, the FY23-24-25 fair value maybe around 275-317-365. Thus short-term target of ITC maybe around 275 (by June 21), mid-term 317 (by Mar’22) and long-term target 365 (Mar’23); growing FMCG brand visibility with premium pricing power may help. Also, a strong deleveraged balance sheet, the huge cash in hand and negligible debt may help in both organic and inorganic expansion in the coming days, once COVID is behind India. 
Technical View: ITC
Technically, whatever may be the narrative, ITC now has to sustain over 214-217 for the next leg of the rally; otherwise, it may correct to some extent as per the below levels. 
ITC: P&L A/C AnalysisQLY
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