ITC- Strong growth momentum continues ::Macquarie Research,

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ITC
Strong growth momentum continues
Event
 ITC reported 4Q and FY11 results with strong performance across all
businesses. FY11 consolidated net sales and profit increased 16% and 20.4%
respectively. Key highlight was margin expansion across all businesses and
14% reduction in other FMCG business losses as margin expanded 183bp.
We believe other FMCG business is on track to become breakeven by the
end of FY12 as we highlighted earlier. Reiterate OP with a new TP of Rs225.
Impact
 Strong sales and profit growth. While net sales grew 16% YoY in FY11
(Rs222.7bn) and 4Q’FY11 (Rs59.6), net profit grew 25% and 20.4% YoY to
Rs12.8bn and Rs50.2bn in 4Q’FY11 and FY11 respectively. The company’s
EBITDA margin expanded 57bp and 21bp in 4Q’FY11 and FY11 respectively.
We believe pricing power in cigarette business coupled with flat tobacco leaf
prices and sourcing advantage provides little downside risks to ITC’s margins.      
 Strong performance in cigarette business despite volumes decline. ITC’s
cigarette net sales (Rs27.7bn) increased 13% YoY despite 2% volume
decline. Cigarette EBIT increased 18% YoY with EBIT margin expansion of
107bp, 10
th
quarter of margin expansion in the last 12-quarter. We think 5%
price hike in January without duty hike in Feb-2011 union budget and lack of
any worthy competitor will pose little threat to ITC’s cigarette revenue and
EBIT growth.
 FMCG business – growth momentum remains strong. ITC is seeing
strong growth in its foods and personal care portfolio with sales growth of 17%
and 23% YoY in 4QFY11 and FY11 respectively. EBIT losses (Rs678m)
declined 14% YoY in 4Q with improved margin.  Branded packaged food
sales grew 25% in FY11 and personal care portfolio is also performing well.
 Strong growth and margin performance in other businesses. Hotel
business reported sales growth of 17%, Paperboard and Packaging 14% and
agri business 9% YoY in 4Q. Hotel, agri business EBIT margin expanded by
219bp and 332bp and paper and packaging business margins were flat.  
Earnings and target price revision
 We raise our target price to Rs225 from Rs209 as we roll forward our model.
Price catalyst
 12-month price target: Rs225.00 based on a Sum of Parts methodology.
 Catalyst: Reversal of cigarette volume growth, breakeven of FMCG business
Action and recommendation
 Outperform maintained. ITC is our preferred play amongst large-cap FMCG
companies, given its robust core cigarette business along with expanding food
and personal care portfolio.
 It is trading at 19% discount to Hindustan Unilever (HUVR IN, Rs310, UP, TP:
Rs265) despite superior earnings growth, which we think is unwarranted.