ITC- Rock solid performance continues ::Edelweiss

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􀂃 Stellar growth continues across segments; numbers beat estimates
ITC’s Q2FY11 results beat our estimates as revenue increased 18% Y-o-Y to INR
50.6 bn (our estimate INR 49.3 bn) and PAT grew 23% Y-o-Y to INR 12.5 bn
(our estimate INR 11.8 bn). EBITDA increased 16.4% Y-o-Y to INR 17.8 bn.
EBITDA margins contracted 47bps Y-o-Y (200bps expansion Q-o-Q) following
435bps jump in other expenditure. This was partially offset by 340bps and 48bps
reduction in COGS and staff expenses, respectively.



􀂃 17% Y-o-Y growth in cig. profits bolstered by less than 1% dip in volume
Volumes in the cigarette business declined less than 1 percentage point Y-o-Y
(against our expectation of 2% drop) vis-à-vis 3-4% Y-o-Y volume decline in
Q1FY11. The company remains confident of flat volumes for FY11 as was guided.
However, in the quarter, ITC was able to grow profits by 17% Y-o-Y, sales by
15% Y-o-Y, and margins by 39bps Y-o-Y due to a combination of price hike and
mix improvement.

􀂃 FMCG business gaining traction; likely to be profitable by FY13
ITC managed to reduce FMCG losses by 21% Y-o-Y with 22% rise in sales and
350bps expansion in margins Y-o-Y. The company is confident of 20% Y-o-Y
reduction in losses in FY11. Biscuits sales grew 30% Y-o-Y and Bingo posted
commendable sales growth of 50% Y-o-Y. ITC launched noodles in Coimbatore
and Bengaluru and skin cream in Kerala, Karnataka, and West Bengal.

􀂃 In a sweet spot in agri, hotels, and paper
The agri business continued its robust performance, with profits and sales up
16% and 22% Y-o-Y, respectively; but margins dipped 74bps Y-o-Y. Hotel profits
rose 26% and sales jumped 21% Y-o-Y and margins expanded 80bps Y-o-Y led
by 8% improvement in occupancy. The paper segment performed remarkably
well due to in house sourcing of pulp and mix improvement; margins expanded
32bps Y-o-Y, with profits and sales rising 32% and 17% Y-o-Y, respectively.

􀂃 Outlook and valuations: Positive; maintain ‘BUY’
ITC enjoys good pricing power in cigarettes and we expect volumes to grow 2-
3% in H2FY11E. As in Q2FY11, cigarettes’ profitability remains largely unaffected
due to strong resilience of cigarettes and ITC’s huge market share. Also, the
company is gaining traction in non-cigarette businesses making it a well
diversified growth company. It remains our top pick in large cap FMCG coverage
with ‘BUY’. On relative return basis, we rate it ‘Sector Outperformer’.