Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ITC (ITC)
Consumer products
Watch for potential increase in payout ratio. ITC is entering a phase of high FCF
generation—we forecast Rs156 bn (Rs20/share) over FY2010-13E. The confluence of all
businesses performing well and no increase in capex plans is driving this—we expect
potential increase in payout ratio from the current 50%. Double-digit excise increase in
budget is a low probability event, in our view—there has not been two consecutive
years of double-digit increase in the last 15 years. 3Q results were better than expected.
Our long-standing positive view on the stock remains. Buy before budget.
ITC remains our top pick – triggers (1) potential increase in dividend payout ratio, (2) likely
moderate budget, (3) competition – what competition?
Potential for increase in dividend payout ratio. We assign a high probability for an increase
in the dividend payout in FY2010-13E as ITC is likely to generate FCF of Rs156 bn and the
company is likely to have cash position of Rs86 bn (Rs11/share) by end-FY2013E.
Cigarette business in fine fettle. We expect a likely moderate Budget 2012 after the 15%
excise hike last year. Historically, there have not been two consecutive penal budgets (doubledigit
increase in excise) and we expect the trend to continue. Further, ITC’s demonstrated
pricing power over the years gives us comfort on its ability to pass on excise increase through
calibrated price hikes. After the 15% price hike last year, the company has taken 12% price
hike in Bristol and 25% price hike in Berkeley in January 2011. Industry sources indicate a 9%
price hike has been taken in Gold Flake, its largest brand.
In 3QFY11, cigarette volume growth was 2% which is in line with expectations. The 30 bps
decline in margins to 29.3% is likely due to phasing of trade spends prior to the Budget and we
retain the annual estimates.
Quality of sales in FMCG is improving. ITC has achieved a 6% market share in soaps—a
highly notable achievement in three years of category entry. We believe this growth in market
share was led by product differentiation (Fiama Di Wills gel bathing bar), aggressive trade
promotions (buy three get one free in Superia) and focused investment in distribution (~50% of
distributors are dedicated distributors for non-cigarette FMCG). In shampoo, its market share is
at 3.5% and we believe that a revisit of marketing mix would be imperative for the company.
Biscuits and staples are likely showing improvement in profitability. Sunfeast has
successfully been upgraded from the mass glucose segment to the high-margin premium
cookies and creams. The company is now leveraging its brand strength to gain a foothold
in the instant noodle market.
We are not worried on the entry of Philip Morris (Marlboro) in RSFT segment. Our channel
checks suggests muted consumer acceptance of Marlboro Compact. In our view, the
cigarette market scenario still favors ITC as, (1) Godfrey Philips (GPI) and Philip Morris
need to ensure that Marlboro Compact (owned by Philip Morris directly) do not
cannibalize GPI’s sales, and (2) relatively limited geographical distribution reach of GPI
versus market leader ITC.
Moreover, while Marlboro has a premium positioning globally, the consumer acceptance
for the brand is likely muted in India due to (1) consumer knowledge of the brand is
limited to urban areas and (3) inability of PMI to engage in brand building due to
restrictions on cigarette advertising.
3QFY11—ahead of estimates
ITC reported net sales of Rs54.5 bn (+19%, KIE Rs51.6 bn), EBITDA of Rs19.7 bn (+19%, KIE
Rs18.9 bn) and PAT of Rs13.9 bn (+21%, KIE Rs13.5 bn).
Cigarette sales growth of 18% with volume growth of ~2% was a positive. In 1QFY11
and 2QFY11, the volume growth was -3% and 0%, respectively. The cigarette volume
growth in 3Q is in line with our thesis that cigarette consumption typically dips after a
significant price hike and gradually reverts to normal consumption rates.
Other FMCG sales grew by 24%—branded packaged food +24% (Sunfeast +28%, Bingo
+48%), stationary +50%.
Agri business sales grew by 18% driven by higher soya, coffee and leaf tobacco sales and
hotel sales grew by 15%. Paperboard segment sales were low at 8% as it was impacted
by the disruption in production in December 2010 due to uncertainty regarding change in
pictorial warning on cigarette packs.
Other income was up by 22% and PAT margin improved by 60 bps during the quarter.
Retain ADD, TP of 185
Our EPS estimates are Rs6.5 and Rs7.8 (upgraded by 3%) for FY2011E and FY2012E,
respectively. We marginally increase target price to Rs185 (Rs180 previously), in line with
earnings revision.
Media reports suggest that implementation of GST is likely postponed from the earlier
deadline of April 1, 2011. While there is no structural change to our ITC view based on this,
we note that this potentially removes the near-term uncertainty for ITC in managing
cigarette portfolio pricing (calibrated price changes typically has lesser impact on volumes).
Key risks are (1) unexpected higher losses in other FMCG, and (2) any aggressive marketing
strategy (including trade discounting) by Philip Morris to promote Marlboro.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
ITC (ITC)
Consumer products
Watch for potential increase in payout ratio. ITC is entering a phase of high FCF
generation—we forecast Rs156 bn (Rs20/share) over FY2010-13E. The confluence of all
businesses performing well and no increase in capex plans is driving this—we expect
potential increase in payout ratio from the current 50%. Double-digit excise increase in
budget is a low probability event, in our view—there has not been two consecutive
years of double-digit increase in the last 15 years. 3Q results were better than expected.
Our long-standing positive view on the stock remains. Buy before budget.
ITC remains our top pick – triggers (1) potential increase in dividend payout ratio, (2) likely
moderate budget, (3) competition – what competition?
Potential for increase in dividend payout ratio. We assign a high probability for an increase
in the dividend payout in FY2010-13E as ITC is likely to generate FCF of Rs156 bn and the
company is likely to have cash position of Rs86 bn (Rs11/share) by end-FY2013E.
Cigarette business in fine fettle. We expect a likely moderate Budget 2012 after the 15%
excise hike last year. Historically, there have not been two consecutive penal budgets (doubledigit
increase in excise) and we expect the trend to continue. Further, ITC’s demonstrated
pricing power over the years gives us comfort on its ability to pass on excise increase through
calibrated price hikes. After the 15% price hike last year, the company has taken 12% price
hike in Bristol and 25% price hike in Berkeley in January 2011. Industry sources indicate a 9%
price hike has been taken in Gold Flake, its largest brand.
In 3QFY11, cigarette volume growth was 2% which is in line with expectations. The 30 bps
decline in margins to 29.3% is likely due to phasing of trade spends prior to the Budget and we
retain the annual estimates.
Quality of sales in FMCG is improving. ITC has achieved a 6% market share in soaps—a
highly notable achievement in three years of category entry. We believe this growth in market
share was led by product differentiation (Fiama Di Wills gel bathing bar), aggressive trade
promotions (buy three get one free in Superia) and focused investment in distribution (~50% of
distributors are dedicated distributors for non-cigarette FMCG). In shampoo, its market share is
at 3.5% and we believe that a revisit of marketing mix would be imperative for the company.
Biscuits and staples are likely showing improvement in profitability. Sunfeast has
successfully been upgraded from the mass glucose segment to the high-margin premium
cookies and creams. The company is now leveraging its brand strength to gain a foothold
in the instant noodle market.
We are not worried on the entry of Philip Morris (Marlboro) in RSFT segment. Our channel
checks suggests muted consumer acceptance of Marlboro Compact. In our view, the
cigarette market scenario still favors ITC as, (1) Godfrey Philips (GPI) and Philip Morris
need to ensure that Marlboro Compact (owned by Philip Morris directly) do not
cannibalize GPI’s sales, and (2) relatively limited geographical distribution reach of GPI
versus market leader ITC.
Moreover, while Marlboro has a premium positioning globally, the consumer acceptance
for the brand is likely muted in India due to (1) consumer knowledge of the brand is
limited to urban areas and (3) inability of PMI to engage in brand building due to
restrictions on cigarette advertising.
3QFY11—ahead of estimates
ITC reported net sales of Rs54.5 bn (+19%, KIE Rs51.6 bn), EBITDA of Rs19.7 bn (+19%, KIE
Rs18.9 bn) and PAT of Rs13.9 bn (+21%, KIE Rs13.5 bn).
Cigarette sales growth of 18% with volume growth of ~2% was a positive. In 1QFY11
and 2QFY11, the volume growth was -3% and 0%, respectively. The cigarette volume
growth in 3Q is in line with our thesis that cigarette consumption typically dips after a
significant price hike and gradually reverts to normal consumption rates.
Other FMCG sales grew by 24%—branded packaged food +24% (Sunfeast +28%, Bingo
+48%), stationary +50%.
Agri business sales grew by 18% driven by higher soya, coffee and leaf tobacco sales and
hotel sales grew by 15%. Paperboard segment sales were low at 8% as it was impacted
by the disruption in production in December 2010 due to uncertainty regarding change in
pictorial warning on cigarette packs.
Other income was up by 22% and PAT margin improved by 60 bps during the quarter.
Retain ADD, TP of 185
Our EPS estimates are Rs6.5 and Rs7.8 (upgraded by 3%) for FY2011E and FY2012E,
respectively. We marginally increase target price to Rs185 (Rs180 previously), in line with
earnings revision.
Media reports suggest that implementation of GST is likely postponed from the earlier
deadline of April 1, 2011. While there is no structural change to our ITC view based on this,
we note that this potentially removes the near-term uncertainty for ITC in managing
cigarette portfolio pricing (calibrated price changes typically has lesser impact on volumes).
Key risks are (1) unexpected higher losses in other FMCG, and (2) any aggressive marketing
strategy (including trade discounting) by Philip Morris to promote Marlboro.
No comments:
Post a Comment