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ITC Ltd. 3QF11: Another Strong Quarter – 2% Cigarette Volume growth
Quick Comment – 3QF11 – In-line Operating
Performance: ITC reported 3QF11 results with revenue,
EBITDA and PAT growth of 19%, 19% and 21%,
respectively, vs. our estimates of 18%, 20% and 19%,
respectively. Cigarette volumes grew by 2% YoY. The
company has delivered strong operational performance
across business segments (except paper and
packaging). Capital employed in the non-cigarette
business increased marginally by 3%. Said differently
RoE of the non-cigarette business continues to improve.
Key Positives: (1) Strong cigarette volume growth if
~2%; (2) Strong cigarette EBIT growth of 17%; (3) Agri
business continues to surprise with revenue and
operating profit growth of 18% and 36%, respectively;
(4) Non tobacco FMCG sales grew by 24%; (5) Capital
employed in the cigarette business is down 8% QoQ.
Key Negatives: (1) Paper and packaging business
disappointed with revenues growth of 8% – margins
declined by 290 bps YoY. According to management
this was largely due to a pipeline correction following the
government ruling on pictorial warnings; (2) 10%
sequential increase in non tobacco FMCG losses;
(3) Lower than expected revenue growth in the hotels
business; and (4) Adjusted net profit grew by 21% driven
by 21% growth in other income (treasury gains).
2% cigarette volume growth: ITC reported cigarette
revenue growth of 18% during the quarter driven by a
combination of price hikes and product mix improvement.
Cigarette volume growth at ~2% was in-line with our
expectations, we believe.
Maintain EW: ITC’s cigarette business has
demonstrated significant resilience despite adverse
regulatory changes. However, we observe that ITC’s
stock price performance is driven by visibility of volume
growth. We await clarity on tax proposals in the
upcoming budget to assess the impact on volumes. We
maintain our EW rating on the stock
Valuation Methodology and Risks
We arrive at our residual income-based sum-of-the-parts
(SOTP) valuation by assigning probabilities to the different
scenarios for each of the businesses. We then apply a holding
discount of 5% to arrive at our target price. We assign 80%
weighting to the base case for the cigarettes business and
assign the balance 20% weighting of bull case value to arrive at
our target price. Hence, to derive our current target price, we
assume base-case residual income values for the paper, agri,
non-tobacco FMCG and the hotels business.
Upside risks:
• Better than expected cigarette volume growth
• Stronger than forecasted profitability in non-tobacco FMCG
business
Downside risks:
• New personal product categories increasing segment losses
Lower than expected cigarette volume growth.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
ITC Ltd. 3QF11: Another Strong Quarter – 2% Cigarette Volume growth
Quick Comment – 3QF11 – In-line Operating
Performance: ITC reported 3QF11 results with revenue,
EBITDA and PAT growth of 19%, 19% and 21%,
respectively, vs. our estimates of 18%, 20% and 19%,
respectively. Cigarette volumes grew by 2% YoY. The
company has delivered strong operational performance
across business segments (except paper and
packaging). Capital employed in the non-cigarette
business increased marginally by 3%. Said differently
RoE of the non-cigarette business continues to improve.
Key Positives: (1) Strong cigarette volume growth if
~2%; (2) Strong cigarette EBIT growth of 17%; (3) Agri
business continues to surprise with revenue and
operating profit growth of 18% and 36%, respectively;
(4) Non tobacco FMCG sales grew by 24%; (5) Capital
employed in the cigarette business is down 8% QoQ.
Key Negatives: (1) Paper and packaging business
disappointed with revenues growth of 8% – margins
declined by 290 bps YoY. According to management
this was largely due to a pipeline correction following the
government ruling on pictorial warnings; (2) 10%
sequential increase in non tobacco FMCG losses;
(3) Lower than expected revenue growth in the hotels
business; and (4) Adjusted net profit grew by 21% driven
by 21% growth in other income (treasury gains).
2% cigarette volume growth: ITC reported cigarette
revenue growth of 18% during the quarter driven by a
combination of price hikes and product mix improvement.
Cigarette volume growth at ~2% was in-line with our
expectations, we believe.
demonstrated significant resilience despite adverse
regulatory changes. However, we observe that ITC’s
stock price performance is driven by visibility of volume
growth. We await clarity on tax proposals in the
upcoming budget to assess the impact on volumes. We
maintain our EW rating on the stock
Valuation Methodology and Risks
We arrive at our residual income-based sum-of-the-parts
(SOTP) valuation by assigning probabilities to the different
scenarios for each of the businesses. We then apply a holding
discount of 5% to arrive at our target price. We assign 80%
weighting to the base case for the cigarettes business and
assign the balance 20% weighting of bull case value to arrive at
our target price. Hence, to derive our current target price, we
assume base-case residual income values for the paper, agri,
non-tobacco FMCG and the hotels business.
Upside risks:
• Better than expected cigarette volume growth
• Stronger than forecasted profitability in non-tobacco FMCG
business
Downside risks:
• New personal product categories increasing segment losses
Lower than expected cigarette volume growth.
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