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ITC Limited
Earnings growth momentum
sustains; Buy
Sep Q PAT of Rs12.5bn; beat est by 6%; PO raised to Rs190
Sep Q profit growth of 24% yoy was led by a strong all round performance on
improving margins across most segments. Our thesis of non-cig businesses
driving growth for ITC in FY11 is playing out with 37% growth in Sep Q. We raise
our EPS est by 3% on improved margins in cig, paper and agri. We raise our PO
to Rs190 (Rs165) on higher target multiple of 24xFY12E (22x) on expected rerating
due to better visibility on earnings post the strong Sep Q performance.
Cigarettes: steeper price hikes supporting growth
ITC managed a healthy 17% EBIT growth in cigarettes as volumes remained flat
during the quarter. Topline growth remains strong at 13% yoy. Key surprise was
margin gains on a high base driven by 1) steep price hikes of 14% 2) strong mix
uptrading and 3) improved scale efficiencies with recovery in volumes. On volume
turning positive from next qtr, we expect growth to remain strong in this segment.
FMCG growth encouraging with fall in losses
FMCG topline grew 22% yoy and losses fell to Rs689mn. Though topline growth
was lower than est, losses were in line. This is encouraging as it shows improving
profitability of the segment. ITC is currently test marketing Skin whitening cream
and Noodles in select markets. These could be launched nationally based on
positive results. Despite these new launches, we expect losses to continue to fall.
Paper and Agri surprise on the upside; Hotels moderate
Agri surprised with 22% sales growth led by strong trade in leaf tobacco. This also led
to margin surprise as margins fell only 70bp on a favorable base. In Papers, 16%
sales growth was in line though EBIT growth of 32% was surprising. Margins went up
320bp led by 9% prices hikes. This should lead to higher sales growth and margin
gains in coming qtrs as well. Hotels disappointed with 20% sales and 26% EBIT
growth on low base of last year. Though Occupancy at 78% remains strong, Average
room rate is up only 1% yoy. Company expects improvement in busy 2H.
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