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ITC - (ITC IN, INR 169, BUY)
Stellar growth continues across segments; numbers beat estimates
ITC’s Q3FY11 results beat our estimates as revenue increased 18.6% Y-o-Y to INR 54.5
bn (our estimate INR 53.4 bn) and PAT grew 21.4% Y-o-Y to INR 13.9 bn (our estimate
INR 13.1 bn). EBITDA was up 18.7% Y-o-Y to INR 19.7 bn and EBITDA margins were flat
Y-o-Y (76bps expansion Q-o-Q). Other expenditure jumped 100bps and was partially
offset by 72bps and 24bps reduction in COGS and staff expenses, respectively.
17% Y-o-Y growth in cig. profits, bolstered by 2% plus growth in volume
Volumes in the cigarette business grew more than 2% Y-o-Y in spite of high base (8.5%
volume growth in Q3FY10) in Q3FY11. This reverses the negative growth trend seen in
the past two quarters. This quarter, ITC was able to grow profits by 17% Y-o-Y and sales
by 18.4% Y-o-Y.
FMCG business continues to surprise; new launches successful
ITC managed to reduce FMCG losses by 14% Y-o-Y with 23.8% rise in sales and 298bps
expansion in margins Y-o-Y. Biscuits sales grew 20% plus Y-o-Y and Bingo posted
commendable sales growth of 48% Y-o-Y. The company, satisfied with initial consumer
response in noodles, nationally rolled out ‘Sunfeast Yippee’ Noodles. Also, it has
progressively extended the skin cream to markets of Tamil Nadu and Assam (initial
launch in Kerala, Karnataka and West Bengal).
In a sweet spot in agri and hotels; paper declines
The agri business continued its robust performance, with profits and sales up 35.5% and
17.9% Y-o-Y, respectively; margins expanded 173bps Y-o-Y. Hotel profits rose 16%,
with sales up 14.6% Y-o-Y. Poor Common Wealth Games impacted hotel business in
Q3FY11, hence the muted growth. Performance of the paper segment deteriorated,
largely on account of a one-off event (due to high pipeline inventory for pictorial
warnings).
Outlook and valuations: Positive; maintain ‘BUY’
Despite hike in excise duties in several union budgets and subsequent rise in cigarette
prices by ITC, the company’s margins have improved and profits grown, indicating its
pricing power and inelastic nature of cigarette demand. ITC is relatively insulated from
commodity inflation in FY12, owing to benign tobacco prices. Also, competition risk is low
as Marlboro is limited to just three cities. We re-iterate ‘BUY’ on ITC and it is one of our
top picks in the FMCG pack. On relative return basis, the stock is rated ‘Sector
Outperformer’.
17% Y-o-Y growth in cig. profits, bolstered by 2% plus growth in volume
Volumes in the cigarette business grew more than 2 percentage point Y-o-Y, despite high
base (8.5% volume growth in Q3FY10) in Q3FY11; this reverses the negative growth
trend seen in the past two quarters. In the quarter, ITC was able to grow profits by 17%
Y-o-Y and sales by 18.4% Y-o-Y. Margins declined 100bps Y-o-Y, which is not of much
concern since the company is confident of sustaining annual margins. Pictorial warning
issue did not have significant impact, either on margin or on volumes. The company
maintains 12-14 months of tobacco inventory, and thus will gain from likely reduction in
international tobacco prices in FY12.
In Q3FY11, ITC raised Gold Flake prices by INR 3 to INR 38 (~8.6% price increase), for a
pack of 10 sticks. Earlier, ITC increased prices of Bristol cigarettes to INR 28 from INR 25
(~12% price increase). Our channel check also suggests price hikes for Gold Flake Light,
Gold Flake King Size and Gold Flake Premium in the coming weeks. ITC declined that the
recent price increases (in Bristol & Gold Flake) were in anticipation of budget excise duty
increases.
Several initiatives launched during the year across the brand portfolio in terms of pack
modernisation, improvement in smoke profile and introduction of new brands and
variants such as Lucky Strike, Classic Menthol Rush, Gold Flake SLK have bolstered the
company’s market standing
FMCG business continues to surprise; new launches successful
ITC managed to reduce FMCG losses by 14% Y-o-Y with 23.8% rise in sales and 298bps
expansion in margins, Y-o-Y.
Sunfeast biscuits sales grew 20% plus Y-o-Y during the quarter, driven by product mix
improvement, with significant growth in sales of value-added variants of cookies and
creams. Bingo posted commendable sales growth of 48% Y-o-Y. The company maintains
market share in early teens in both the product categories of biscuits and packaged snacks.
In the staples category, Aashirvaad atta further strengthened its leadership position with
sales during the quarter driven by improved realisation and higher volumes. ITC
leveraged Aashirvaad brand with launch of ‘Aashirvaad’ rasam and sambhar blended
powders in target markets.
The company, satisfied with initial consumer response in noodles, nationally rolled out
Sunfeast Yippee noodles. The company has progressively extended the skin cream (Vivel
Active Fair Cream) into markets of Tamil Nadu and Assam (initial launch in Kerala,
Karnataka and West Bengal).
In soaps, the company maintains 5% plus market share, and is looking at market leaders
like HUL and GCPL for directions in terms of price hikes. As HUL and GCPL are planning
to take price hike, we believe, ITC will follow.
In shampoo, the company maintains 3% plus market share.
In the retail segment, Lifestyle retail stores achieved stunning 30% plus growth, with
same store growth of 20% plus, primarily led by recovery in the retail business.
Hotel: In revival mode
Hotel profits rose 16% and sales were up 14.6% Y-o-Y. Poor Common Wealth Games
impacted the hotel business in Q3FY11, hence the muted growth. The company was able
to achieve occupancy rate of 60-65% and ARR grew 10% Y-o-Y to INR 9,000 in Q3FY11.
Agri business in a sweet spot
The agri business continued its robust performance, with profits and sales up 35.5% and
17.9% Y-o-Y, respectively; margins expanded 173bps Y-o-Y on the back of increased sale
of soya and coffee. Leaf tobacco gave muted performance, as Q3 is structurally weak for
leaf tobacco, and is expected to pick up from the next quarter. The business provides
strategic sourcing support to the company’s cigarette and branded packaged foods
business by ensuring high quality supplies. Construction activity of the new green leaf
threshing facility in Karnataka is progressing satisfactorily
Paper: Deteriorates, largely due to one-off event
ITC posted muted revenue growth of 8.4% and profit declined 5%, Y-o-Y. Margins reduced
240bps, largely on account of one-off event due to high pipeline inventory for pictorial
warnings. Despite this, the segment achieved 12% YTD growth. The company expects EBIT
margin of ~22% from this segment next quarter.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
ITC - (ITC IN, INR 169, BUY)
Stellar growth continues across segments; numbers beat estimates
ITC’s Q3FY11 results beat our estimates as revenue increased 18.6% Y-o-Y to INR 54.5
bn (our estimate INR 53.4 bn) and PAT grew 21.4% Y-o-Y to INR 13.9 bn (our estimate
INR 13.1 bn). EBITDA was up 18.7% Y-o-Y to INR 19.7 bn and EBITDA margins were flat
Y-o-Y (76bps expansion Q-o-Q). Other expenditure jumped 100bps and was partially
offset by 72bps and 24bps reduction in COGS and staff expenses, respectively.
17% Y-o-Y growth in cig. profits, bolstered by 2% plus growth in volume
Volumes in the cigarette business grew more than 2% Y-o-Y in spite of high base (8.5%
volume growth in Q3FY10) in Q3FY11. This reverses the negative growth trend seen in
the past two quarters. This quarter, ITC was able to grow profits by 17% Y-o-Y and sales
by 18.4% Y-o-Y.
FMCG business continues to surprise; new launches successful
ITC managed to reduce FMCG losses by 14% Y-o-Y with 23.8% rise in sales and 298bps
expansion in margins Y-o-Y. Biscuits sales grew 20% plus Y-o-Y and Bingo posted
commendable sales growth of 48% Y-o-Y. The company, satisfied with initial consumer
response in noodles, nationally rolled out ‘Sunfeast Yippee’ Noodles. Also, it has
progressively extended the skin cream to markets of Tamil Nadu and Assam (initial
launch in Kerala, Karnataka and West Bengal).
In a sweet spot in agri and hotels; paper declines
The agri business continued its robust performance, with profits and sales up 35.5% and
17.9% Y-o-Y, respectively; margins expanded 173bps Y-o-Y. Hotel profits rose 16%,
with sales up 14.6% Y-o-Y. Poor Common Wealth Games impacted hotel business in
Q3FY11, hence the muted growth. Performance of the paper segment deteriorated,
largely on account of a one-off event (due to high pipeline inventory for pictorial
warnings).
Outlook and valuations: Positive; maintain ‘BUY’
Despite hike in excise duties in several union budgets and subsequent rise in cigarette
prices by ITC, the company’s margins have improved and profits grown, indicating its
pricing power and inelastic nature of cigarette demand. ITC is relatively insulated from
commodity inflation in FY12, owing to benign tobacco prices. Also, competition risk is low
as Marlboro is limited to just three cities. We re-iterate ‘BUY’ on ITC and it is one of our
top picks in the FMCG pack. On relative return basis, the stock is rated ‘Sector
Outperformer’.
17% Y-o-Y growth in cig. profits, bolstered by 2% plus growth in volume
Volumes in the cigarette business grew more than 2 percentage point Y-o-Y, despite high
base (8.5% volume growth in Q3FY10) in Q3FY11; this reverses the negative growth
trend seen in the past two quarters. In the quarter, ITC was able to grow profits by 17%
Y-o-Y and sales by 18.4% Y-o-Y. Margins declined 100bps Y-o-Y, which is not of much
concern since the company is confident of sustaining annual margins. Pictorial warning
issue did not have significant impact, either on margin or on volumes. The company
maintains 12-14 months of tobacco inventory, and thus will gain from likely reduction in
international tobacco prices in FY12.
In Q3FY11, ITC raised Gold Flake prices by INR 3 to INR 38 (~8.6% price increase), for a
pack of 10 sticks. Earlier, ITC increased prices of Bristol cigarettes to INR 28 from INR 25
(~12% price increase). Our channel check also suggests price hikes for Gold Flake Light,
Gold Flake King Size and Gold Flake Premium in the coming weeks. ITC declined that the
recent price increases (in Bristol & Gold Flake) were in anticipation of budget excise duty
increases.
Several initiatives launched during the year across the brand portfolio in terms of pack
modernisation, improvement in smoke profile and introduction of new brands and
variants such as Lucky Strike, Classic Menthol Rush, Gold Flake SLK have bolstered the
company’s market standing
FMCG business continues to surprise; new launches successful
ITC managed to reduce FMCG losses by 14% Y-o-Y with 23.8% rise in sales and 298bps
expansion in margins, Y-o-Y.
Sunfeast biscuits sales grew 20% plus Y-o-Y during the quarter, driven by product mix
improvement, with significant growth in sales of value-added variants of cookies and
creams. Bingo posted commendable sales growth of 48% Y-o-Y. The company maintains
market share in early teens in both the product categories of biscuits and packaged snacks.
In the staples category, Aashirvaad atta further strengthened its leadership position with
sales during the quarter driven by improved realisation and higher volumes. ITC
leveraged Aashirvaad brand with launch of ‘Aashirvaad’ rasam and sambhar blended
powders in target markets.
The company, satisfied with initial consumer response in noodles, nationally rolled out
Sunfeast Yippee noodles. The company has progressively extended the skin cream (Vivel
Active Fair Cream) into markets of Tamil Nadu and Assam (initial launch in Kerala,
Karnataka and West Bengal).
In soaps, the company maintains 5% plus market share, and is looking at market leaders
like HUL and GCPL for directions in terms of price hikes. As HUL and GCPL are planning
to take price hike, we believe, ITC will follow.
In shampoo, the company maintains 3% plus market share.
In the retail segment, Lifestyle retail stores achieved stunning 30% plus growth, with
same store growth of 20% plus, primarily led by recovery in the retail business.
Hotel profits rose 16% and sales were up 14.6% Y-o-Y. Poor Common Wealth Games
impacted the hotel business in Q3FY11, hence the muted growth. The company was able
to achieve occupancy rate of 60-65% and ARR grew 10% Y-o-Y to INR 9,000 in Q3FY11.
Agri business in a sweet spot
The agri business continued its robust performance, with profits and sales up 35.5% and
17.9% Y-o-Y, respectively; margins expanded 173bps Y-o-Y on the back of increased sale
of soya and coffee. Leaf tobacco gave muted performance, as Q3 is structurally weak for
leaf tobacco, and is expected to pick up from the next quarter. The business provides
strategic sourcing support to the company’s cigarette and branded packaged foods
business by ensuring high quality supplies. Construction activity of the new green leaf
threshing facility in Karnataka is progressing satisfactorily
Paper: Deteriorates, largely due to one-off event
ITC posted muted revenue growth of 8.4% and profit declined 5%, Y-o-Y. Margins reduced
240bps, largely on account of one-off event due to high pipeline inventory for pictorial
warnings. Despite this, the segment achieved 12% YTD growth. The company expects EBIT
margin of ~22% from this segment next quarter.
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