ITC's Annual Report Highlights Innovation and Market Prospects Amid Evolving Cigarette Business Landscape

ITC's annual report emphasizes the company's commitment to strengthening its product portfolio through innovation. Emkay Global, a financial services company, has recommended buying ITC's shares with a price target of Rs 525. Over the years, the contribution of the cigarette business to ITC's revenue has decreased from 47% in FY13 to 37% in FY23, although this is based on a larger revenue base. The company's leadership position has been sustained through a focus on developing a range of high-quality products, leveraging consumer insights, maintaining a robust innovation pipeline, and having world-class product development capabilities.

Emkay Global's report estimates an approximately 8% sales growth for the business on a compounded basis, amounting to over Rs 24,000 crore for FY23, with a projected 9% growth in EBIT between FY23 and FY26. ITC has recently launched differentiated variants of its cigarette brands, such as Classic Connect, Gold Flake Indie Mint, Gold Flake Kings Mixpod, Classic Alphatec, Gold Flake Smart Mintz, Wills Fab, and Lucky Strike.

The Annual Report

ITC's annual report highlights the company's efforts to combat illicit trade, strengthen its market position through innovative product offerings, and make its products more widely available through effective execution. Emkay Global maintains a buy recommendation on ITC's shares with a price target of Rs 525, citing promising long-term prospects. On the stock exchange, ITC's shares closed at Rs 473.55 on Friday, representing a significant increase of over 60% in the past year.

Regarding the core cigarette business, Emkay Global expects rational tax hikes in the future, given the higher share of the ad-valorem component, which could boost volumes. This, combined with an improving product mix, is anticipated to contribute to high-single-digit EBIT growth. In non-cigarette operations, profitable growth and an improving return profile are expected, with individual segments being self-sufficient in addressing their growth requirements. The report acknowledges that execution will be crucial in sectors such as F&B, agri-exports, and paper, which are experiencing increased demand. The report also recognizes early capital expenditure as a competitive advantage for ITC, enhancing the company's long-term prospects, and identifies potential value unlocking in the hotel operations as a near-term catalyst.

Specifically focusing on the cigarettes business, the report mentions key factors that could positively impact the industry, such as a higher ad-valorem component in taxation, which may limit the need for significant tax hikes. While double-digit taxation cannot be ruled out entirely, the report believes the government will adopt a rational approach in imposing tax increases. Furthermore, the report highlights ITC's efforts to connect with the youth through innovative formats, including low-smell products and flavored and capsule formats. It also notes the company's success in curbing illegal supplies and improving the sales mix from deluxe-size filter tip to regular-size filter tip and then to king-size filter tip, among other positive developments.