ITC (ITC.BO) Buy: Strong All-Round Growth; Citi

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ITC (ITC.BO)
Buy: Strong All-Round Growth; Increasing Target Price to Rs190
 2QFY11 marginally ahead — PAT of Rs12.5bn rose ~24% Y/Y, ahead of
our/consensus estimates (Rs12.4/11.7bn). EBITDA margins were flat Y/Y at
35.3%, primarily driven by the cigarette business’s healthy performance,
supported by other FMCG businesses and paper business. Net revenues of
Rs50.6bn (+16% Y/Y) were in line with estimates.
 Cigarette volumes stabilize — Despite ITC’s aggressive price hikes over Feb-Apr,
volumes were stable – mgmt noted that volumes were marginally negative (less
than -1% Y/Y) during the Q; encouraging, given 2QFY10’s high base of +8% Y/Y.
This, coupled with mix improvements, led to ~15% and ~16.5% Y/Y growth
(40bps margin expansion) in cigarette revenues and profits respectively. We
forecast 1% and 4% underlying cigarette volume growth in FY11/12E respectively.
 Other FMCG losses decline 21% Y/Y and 25% QoQ — Non-cigarette FMCG
revenue growth of 22% Y/Y was driven by better realizations/mix benefits in
biscuits/staples. We forecast PP exit revenue run rate at ~Rs5bn p.a. Mgmt
expects losses to reduce by ~20% Y/Y in FY11E and targets breakeven in FY13E.
 Non FMCG business updates — a) Better pricing & product mix enrichment drove
17%/32% Y/Y growth in revenues/EBIT for paper/paperboards business. b) While
hotels performance was a tad below expectations, agri business was in line as
revenues rose 22% Y/Y (soya & rice), though margins contracted 70bps Y/Y.
 Maintain Buy; Hiking TP to Rs190 — We increase FY11-13E est. by 4-6% to
reflect: a) higher FMCG revenues, & b) lower tobacco costs in FY12/13E. Our TP
of Rs190 is based on 25x Mar12E, rolled forward from 22x Sept11E. We raise our
target multiple as we expect the premium to be higher than the last 3yr avg. given
a) recent trends in cigarette volumes, despite aggressive price hikes; & b) better
contribution from the other businesses should enhance profitability. Our target
absolute & relative (to Sensex) P/E multiples are above last 3yr avg. (21x/1.3x),
but below peak levels (~28x/1.75x). We project strong 19% EPS CAGR FY10-12E.