Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ITC (ITC.BO, Rs154, OW, PT Rs184)
Investment Thesis: Why OW
• Increased conviction in the company’s ability to manage
profitability even in an environment of sharp tax-driven
price hikes - correlation of ITC’s stock price to cigarette
volumes seems to be breaking down.
• Continuing structural improvement in non-cigarette
business profitability.
• We expect ITC’s dividend payout to increase.
• The stock is currently trading at 20.3x F12e vs. India
Consumer average of 22.4x F12e
We recently upgraded ITC to OW and continue to prefer it
to HUL: We have increased conviction in ITC’s ability to
manage cigarette profitability despite sharp excise-driven
price hikes. More importantly, ITC’s paper and agriculture
businesses are now delivering economic returns. We also
believe the company will be relatively immune to a potential
increase in the competition that other FMCG companies may
face. Although regulatory and tax risks persist for ITC, the
company has demonstrated strong pricing power and has
been able to capitalize on improved farm incomes. A
continued improvement in dividend payout ratio is also likely,
in our view. The stock is currently trading at 20.3x F12e vs.
India Consumer average of 22.4x F12e.
Investment Positives
Company is in the best cigarette volume growth market in
the world with large entry barriers.
Non-tobacco business is highly profitable.
Implementation of Goods and Services Tax (GST) is
likely to take away state government’s flexibility to change
tax rate on cigarettes, a structural positive.
Foods portfolio (ex snack food) is turning profitable.
Investment Concerns
Investment in overall non-tobacco FMCG not yielding
desired results, we believe
Return on incremental capital employed is declining.
Competition in cigarette markets may strengthen.
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 2.5% 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 of ~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 the management this was
largely on account pipeline correction following the
government ruling on pictorial warnings (2) 10% sequential
increase in non tobacco FMCG loss (3) Lower than expected
revenue growth in the Hotels Business (3) Adjusted net profit
grew by 21% driven by 21% growth in other income (treasury
gains).
Cigarette Regulation – An Important Stock Driver: We
believe that the government’s regulatory policy (largely
taxation) is the valuation tool for ITC’s cigarettes business.
Changes in regulatory policy are reflected in cigarette
volumes, in our view. Historically, ITC’s valuation
re-rating/de-rating has largely been linked to cigarette volume
growth.
Investment Thesis
• We have an OW rating on ITC due to
increased conviction in the
company’s ability to manage
cigarette profitability despite sharp
excise-driven price hikes.
• More important, ITC’s paper and
agriculture businesses are now
delivering economic returns.
• We believe the company will be
relatively immune to a potential
increase in the competition that
other FMCG companies may face.
• Although regulatory and tax risks
persist for ITC, the company has
demonstrated strong pricing power
and has been able to capitalize on
improved farm incomes.
• Improvement in dividend payout
ratio
Key Value Drivers
• Cigarette volume growth
• Profitability of non-tobacco FMCG
businesses
• Investments/returns in agriculture,
hotels and paper businesses
Potential Catalysts
• Government regulation (excise duty
and taxes on cigarettes)
• Cigarette prices and volume
• Turnaround in FMCG business
• Entry into new personal products
categories
• Market environment for cyclicals
Risks
• The market could still receive tax
increases >10% negatively
• New personal products 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 (ITC.BO, Rs154, OW, PT Rs184)
Investment Thesis: Why OW
• Increased conviction in the company’s ability to manage
profitability even in an environment of sharp tax-driven
price hikes - correlation of ITC’s stock price to cigarette
volumes seems to be breaking down.
• Continuing structural improvement in non-cigarette
business profitability.
• We expect ITC’s dividend payout to increase.
• The stock is currently trading at 20.3x F12e vs. India
Consumer average of 22.4x F12e
We recently upgraded ITC to OW and continue to prefer it
to HUL: We have increased conviction in ITC’s ability to
manage cigarette profitability despite sharp excise-driven
price hikes. More importantly, ITC’s paper and agriculture
businesses are now delivering economic returns. We also
believe the company will be relatively immune to a potential
increase in the competition that other FMCG companies may
face. Although regulatory and tax risks persist for ITC, the
company has demonstrated strong pricing power and has
been able to capitalize on improved farm incomes. A
continued improvement in dividend payout ratio is also likely,
in our view. The stock is currently trading at 20.3x F12e vs.
India Consumer average of 22.4x F12e.
Investment Positives
Company is in the best cigarette volume growth market in
the world with large entry barriers.
Non-tobacco business is highly profitable.
Implementation of Goods and Services Tax (GST) is
likely to take away state government’s flexibility to change
tax rate on cigarettes, a structural positive.
Foods portfolio (ex snack food) is turning profitable.
Investment Concerns
Investment in overall non-tobacco FMCG not yielding
desired results, we believe
Return on incremental capital employed is declining.
Competition in cigarette markets may strengthen.
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 2.5% 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 of ~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 the management this was
largely on account pipeline correction following the
government ruling on pictorial warnings (2) 10% sequential
increase in non tobacco FMCG loss (3) Lower than expected
revenue growth in the Hotels Business (3) Adjusted net profit
grew by 21% driven by 21% growth in other income (treasury
gains).
Cigarette Regulation – An Important Stock Driver: We
believe that the government’s regulatory policy (largely
taxation) is the valuation tool for ITC’s cigarettes business.
Changes in regulatory policy are reflected in cigarette
volumes, in our view. Historically, ITC’s valuation
re-rating/de-rating has largely been linked to cigarette volume
growth.
Investment Thesis
• We have an OW rating on ITC due to
increased conviction in the
company’s ability to manage
cigarette profitability despite sharp
excise-driven price hikes.
• More important, ITC’s paper and
agriculture businesses are now
delivering economic returns.
• We believe the company will be
relatively immune to a potential
increase in the competition that
other FMCG companies may face.
• Although regulatory and tax risks
persist for ITC, the company has
demonstrated strong pricing power
and has been able to capitalize on
improved farm incomes.
• Improvement in dividend payout
ratio
Key Value Drivers
• Cigarette volume growth
• Profitability of non-tobacco FMCG
businesses
• Investments/returns in agriculture,
hotels and paper businesses
Potential Catalysts
• Government regulation (excise duty
and taxes on cigarettes)
• Cigarette prices and volume
• Turnaround in FMCG business
• Entry into new personal products
categories
• Market environment for cyclicals
Risks
• The market could still receive tax
increases >10% negatively
• New personal products categories
increasing segment losses
• Lower-than-expected cigarette
volume growth
No comments:
Post a Comment