ITC reported its Q4 FY3/17 results which were largely in line with our and consensus estimates. Key highlight for the quarter was its cigarette division’s (accounted for around 62% and 85% of the company’s FY3/16 revenues and EBIT, respectively) gross revenues, which grew by 4.8% YoY with volumes remaining flat YoY while EBIT for the division grew by 8% YoY. Gross revenues for the other key business, fast moving consumer goods (FMCG; accounted for 18% of company’s FY3/16 revenues) grew 6.5% YoY while EBIT declined by 21.6% YoY on account of inflation in raw material prices and brand building. We believe that with the revenue-neutral impact of announced goods and services tax (GST) rates for cigarettes, a key overhang for investors around high taxation on cigarettes has been removed. As a result, we forecast a cigarette volume growth revival through average annual growth of 3% over FY3/18–19. This coupled with prospects of profitability improvement in FMCG led by economies of scale kicking in, we estimate ITC’s earnings CAGR improving to 15.2% over FY3/18–19 from 4.1% CAGR registered over FY3/16–17. We maintain our BUY rating. Our sum of the parts (SOTP) based target price rises to Rs370 (previously Rs330) as we increase our PER applied to ITC’s cigarette division to 31x (28x previously) with the key overhang of GST going away. Key catalysts are volume growth recovery in cigarette business and improved profitability of FMCG business.
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