ITC -Strong results, stronger outlook::Macquarie

Visit http://indiaer.blogspot.com/ for complete details �� ��


ITC
Strong results, stronger outlook
Event
 ITC reported robust 2Q FY11 results. PAT grew by 23% YoY, ahead of our
and street expectations. Cigarette volumes were flat, but cigarette EBIT grew
strongly, by 17%YoY. We upgrade our target price to Rs200/share (from
Rs187 previously) and reiterate our Outperform recommendation.
Impact
 Strong growth in core “cigarette” business: ITC's 2Q FY11 sales grew
17% YoY (Rs51.5bn), driven by the primary top-line driver, ie, cigarettes.
Cigarette volumes were flat. This was due to ~15% weighted average price
hikes undertaken by the company to pass on the 17% excise hike on
cigarettes to consumers. The volumes were in line with expectations;
however, as the product mix improved, cigarette revenues were better than
expected.
 Strong growth in all other business: Non-cigarette businesses grew by
20% YoY and now contribute 42% to gross sales (up 100bp YoY).
 Agri business grew by 22%YoY due to better trading opportunities in soya
and rice. Hotels grew by 20%YoY due to an improved economic scenario.
Paperboard and packaging business grew by 17%YoY. Sales to
customers in consumer electronics and the FMCG industry registered
robust growth.
 The FMCG business grew by 22% YoY. The food business grew by 26%,
driven by strong sales of Bingo, Sunfeast biscuits and Aashirvaad flour.
The personal care business grew strongly, on back of strong growth in
soaps, shampoo and new launches. The stationery business grew by
25% YoY.
 Ninth consecutive quarter of margin expansion in cigarettes: Cigarettes’
EBIT margin expanded 178bp to 57% due to price hikes. Paperboards and
packaging EBIT grew 32% YoY, due to product mix improvement and inhouse
pulp production. FMCG losses declined 21% despite several new
launches. Hotels margin expanded 80bp, and the agri business margin
remained strong.
Earnings and target price revision
 We are increasing our EPS forecast by 3% for FY11E and FY12E. We
upgrade our target price to Rs200/share (from Rs187 previously).
Price catalyst
 12-month price target: Rs200.00 based on a Sum of Parts methodology.
 Catalyst: Cigarette volume growth turning positive.
Action and recommendation
 With our upgrades, we continue to remain more optimistic than the market on
ITC's pricing power and the resilience in cigarette volumes.
 ITC is our preferred play amongst large-cap FMCG companies. It is trading
at 18% discount to Hindustan Unilever (HUVR IN, Rs294.10, Underperform,
TP: Rs210.00) despite superior earnings growth, which we think is
unwarranted. We recommend a switch to ITC from HUVR.