KRChoksey Research has reiterated its BUY recommendation on ITC Ltd with a revised target price of Rs 494, reflecting a 15.6% upside potential from the current market price of Rs 427. The company's Q3FY25 performance was largely in line with expectations, driven by strong cigarette volume growth and resilient demand in FMCG and Agri segments. However, rising input costs and weak discretionary spending impacted the margins. ITC’s hotel business demerger, soft demand, and inflationary pressures led to a downward revision of FY26E/FY27E EPS estimates. Despite these headwinds, long-term growth prospects remain strong with steady market share gains and robust execution strategies.

Q3FY25 Financial Performance: Revenue Growth Continues

ITC reported 9.1% year-over-year (YoY) revenue growth in Q3FY25, reaching Rs 203,500 million. However, the quarter-on-quarter (QoQ) decline of 5.5% was attributed to seasonal weakness and subdued consumer demand.

Key Financial Highlights

EBITDA rose 2.4% YoY to Rs 63,619 million, though it declined 2.9% QoQ due to higher-than-expected operating costs.
EBITDA margin contracted by 226 basis points (bps) YoY to 33.9%, reflecting inflationary pressures on raw materials such as wheat, edible oils, and packaging materials.
Adjusted net profit declined 8.4% YoY to Rs 47,314 million, missing analyst estimates primarily due to negative operating leverage and lower other income.
Segment-Wise Performance: Strength in Cigarettes, Challenges in FMCG
Cigarettes: Strong Volume-Led Growth
Cigarette revenue grew 7.8% YoY, contributing 42.1% of total revenue.
Volume growth stood at 6.0% YoY, supported by premium product expansion, strategic market interventions, and crackdown on illicit trade.
Despite higher leaf tobacco costs, pricing power and market dominance ensured stable performance.
FMCG - Other Products: Soft Demand Weighs on Margins
Revenue increased 4.0% YoY, contributing 25.5% of total sales.
Strong demand was seen in atta, snacks, dairy, and premium personal care products.
QoQ revenue decline of 2.8% was impacted by seasonal softness in notebooks and rising inflation in input costs.
Margins contracted due to cost pressures in edible oil, wheat, cocoa, and packaging.
Agri Business: Export Demand Drives Growth
Revenue grew 10.8% YoY but declined 38.0% QoQ due to seasonal factors and restrictions on wheat and rice exports.
Strong demand for leaf tobacco and value-added agri exports supported segment profitability.
Paperboards & Packaging: Cost Pressures Persist
Revenue grew 3.1% YoY to 10.1% of total sales, with 1.5% QoQ growth.
Margins were under pressure due to low-priced Chinese imports and rising wood costs.
Hotels: Strong Growth Ahead of Demerger
Revenue increased 14.6% YoY, driven by retail, weddings, and F&B segments.
Demerger of ITC Hotels was completed on January 1, 2025, and it is now accounted for as a discontinued operation.

Margin Analysis: Inflation and Higher Costs Weigh on Profitability

Gross margin declined by 185bps YoY, primarily due to food inflation and rising raw material costs.
EBITDA margin fell by 226bps YoY, reflecting higher operating expenses and inflationary headwinds.
FMCG EBIT margin contracted 241bps YoY, impacted by costlier raw materials.
Agri business EBIT margin expanded 205bps YoY, supported by strong leaf tobacco exports.

Strategic Developments: Expansion and Market Growth

Acquisition of Prasuma and Meatigo
ITC has acquired Ample Foods Pvt. Ltd. and Meat and Spice Pvt. Ltd., known for Prasuma and Meatigo brands. This move aims to:

Expand ITC’s frozen and ready-to-cook food offerings.
Strengthen Master Chef brand, entering high-growth frozen snack categories.
Gradual stake acquisition over three years, reaching 100% ownership by June 2028.
Cigarette Business: Market Leadership Strengthened
Premiumization strategy continues with Classic Connect and Gold Flake Social.
Stable taxation and government crackdown on illicit trade have supported growth.
New Track and Trace mechanism under GST to further curb illicit cigarette trade.
Valuation & Investment Outlook
Stock Target and Recommendation
Revised target price: Rs 494 (previous: Rs 520)
Potential upside: 15.6%
Recommendation: BUY
Valuation Approach
Cigarette business valued at 13.0x EV/EBITDA.
Agri business valued at 5.0x EV/EBITDA.
Paperboards valued at 4.0x EV/EBITDA.
FMCG valued at 8.0x EV/Revenue.
ITC Hotels demerged, with valuation based on 40% of market capitalization.

Key Takeaways and Investor Considerations

Cigarette business remains a key revenue driver, with stable taxation and strong premiumization efforts.
FMCG segment faces near-term inflationary challenges, but long-term growth remains intact.
Paper and Packaging segment struggles with cost pressures, but exports offer resilience.
Strategic acquisitions in the frozen food sector will enhance product offerings and market share.
ITC's valuation remains attractive, supported by its market leadership, expansion efforts, and resilient business model.

Conclusion

Despite short-term margin pressures and weak discretionary demand, ITC’s strong market positioning, strategic acquisitions, and premiumization efforts make it a compelling long-term investment. The stock’s valuation remains attractive, with steady earnings growth and robust execution strategies supporting upside potential.

Disclaimer
Investors should conduct their own due diligence and consult financial advisors before making any investment decisions.