UBS:: Buy ITC - Cigarette volumes are back

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UBS Investment Research
ITC 
Cigarette volumes are back  
 
„ Cigarette volumes +2-3%, Cigarette EBIT +17%
ITC’s 3QFY11 Cigarette revenue grew 18% YoY (UBS estimate: 17%), with an
underlying ~2-3% growth in volumes (UBS estimate: 2%) compared with flat
volumes in Q2. Cigarette EBIT margin at 29.3% (UBS estimate: 29.8%) but higher
revenue ensured overall EBIT at Rs15.3bn, in line with expectations. Overall
EBITDA rose 18.7% and PAT rose 21.4%.

„ Cigarette business review
With no clarity on the graphics on packs, ITC had despatched higher stocks into
the system pre-December 2010. The countrywide launch of micro filters has
caused margin compression on a YoY basis. We expect positive volume growth
into Q4FY11. We have built in a 7% excise duty increase in our model but believe
that there is a possibility of no increase in tax as the goods and services tax (GST)
is expected to be implemented in 2012.

„ Other businesses
The consumer staples business grew 24% demonstrating continued management
focus; losses came in at Rs736m (UBS estimate:  Rs640m). Hotels and
agribusiness recorded a better business mix compared to UBS estimates, as Q3 is
the seasonally strong quarter for hotels (due to tourist arrivals) and agribusiness
(due to the leaf tobacco season; paperboard underperformed compared to UBS
estimates).

„ Valuation: maintain Buy rating and price target of Rs220
We derive our price target from a DCF-based methodology, explicitly forecasting
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11%, an interim growth rate of 13.5%, and a terminal growth rate of 5%.