ITC: Good Q2FY11 - Overweight, but would look for better entry points: JPMorgan

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ITC Limited
Overweight
ITC.BO, ITC IN
Good Q2FY11 - Overweight, but would look for better
entry points



• Good Q2FY11: Net sales, EBITDA and PAT grew 18%, 16% and 23% y/y,
respectively, during Q2FY11. Higher than estimated agri and paper business
revenue and marginally better cigarette revenues led to sales coming in 4%
higher than expectations. However, EBITDA was in-line with our
expectations as lower (than estimated) margins for hotels and higher growth
for agri-business offset margin gains for cigarettes and paper business.
Higher other income (due to higher dividend income and sale of some
investments) led to higher PAT growth.
• Impressive performance of cigarette business: Volume decline for
cigarettes was contained at less than 1% y/y during Q2FY11 we estimate,
recovering sequentially from 3-4% y/y vol decline witnessed in Q1FY11.
Margins expanded 40bp y/y, led by price hikes and improved mix, though
tobacco leaf costs were firm. We expect volumes to pick up in subsequent
quarters and are confident that cigarette division will be able to register
marginal positive volume growth for the full year and could achieve our
EBIT growth assumption of 17% for FY10-12E. We further expect high
leaf costs to moderate in FY12.
• Non-tobacco business shows good traction. We are positively surprised
by better than expected margin (+290bp y/y) growth for paper business
aided by price hikes and improved mix. Lower EBIT losses for other FMCG
and better (than expected) profitability for agri business were other positives.
Subdued margin performance of hotels was disappointing, though we expect
2HFY11 to be much better as ARRs will likely rise along with higher
occupancy levels. We now estimate EBIT growth of 32% for non-cigarette
businesses during FY10-13, driven by robust revenue growth trends across
divisions and lower losses for other FMCG division. We expect EBIT
contribution for these businesses to increase from 17% in FY10 to 23% in
FY13.
• Maintain OW: Our EPS estimates for FY11-12 are revised up by 2-4%. We
retain our OW stance on the stock and maintain it as our preferred pick in
our coverage universe. The stock has run up 32% over the past six months
and we would seek better entry points. Key risks to our earnings and PT
include substantial decline in cigarette volumes and any legislative changes
that impact cigarette demand.