Cigarette volumes recover but Ebit below: ITC’s cigarette revenues jumped 9.6% y-o-y led by 7.5% y-o-y volume growth (volumes declined 5% y-o-y in the base). Cigarette Ebit growth was 8.8% y-o-y (margins down 50bps y-o-y), impacted by higher input costs (leaf tobacco), higher salience of 64mm cigarette (~37% of volumes) and increased salience of lower margin flavoured capsule cigarette, considering the capsules are imported. We expect price hikes to come soon to help improve Ebit growth trajectory. Tax increase in interim budget on 1st Feb remains a key monitorable. We are building in 10% tax increase in FY20.

Other FMCG, margin uptick continues: Other FMCG business saw sales growth of 11.5% y-o-y impacted by restructuring at lifestyle retailing business and timing difference in trade promotion of matches and agarbatti business. Growth in core FMCG (packaged foods, dairy and personal care) business was ~13% y-o-y. Profitability continues to improve with 63.1% Ebit and 41.6% y-o-y Ebitda growth. Ebitda margin improved by 115bps y-o-y to 5.4%. Growth in this segment should remain steady with further entry into categories such as flavoured drink and premium chocolates.

Paper strong show but Agri, hotels a mixed bag: Hotel, paper and agri business saw topline growth of 11.7% y-o-y, 20.5% y-o-y and 25.7% y-o-y, respectively. Growth in hotels was led by better room rentals and agri growth improved due to trading opportunity in some crops (wheat, oilseeds, coffee, etc.). Ebit growth for hotels stood at a soft 10.1% y-o-y due to gestation cost of new hotels, agri business Ebit dipped by 14.8% y-o-y while paper Ebit improved 23.8% y-o-y.

PT and view: FY19 is proving to be a volume recovery year with no tax hikes and stable pricing for cigarettes business. Ebit growth of ~8.5% y-o-y in 9MFY19 is tracking below our ~11% full year estimates due to absence of price hikes. We cut our FY19-21 EPS by ~2%. Valuations at 25x FY20 PE for ~11% EPS CAGR make risk-reward favourable. Maintain Buy with PT at `360. Key risk is >12% tax increase in FY20, leading to a volume decline in cigarettes.