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Smoking out cash
ITC’s FY11 annual report highlights the improving trend in ITC’s capital
efficiencies. The company’s RoE is now at a 10 year high of 33% driven
by higher margins and improving trend in asset turns. With the special
dividends over the last two years, the 5-year average dividend payout
ratio works out to 72%, yet the company carries US$580m in cash. In
this context, we believe that the widening PE discount to FMCG peers is
unjustified. Any potential adverse tax action in certain states creating
stock weakness will be an opportunity to buy.
RoE moves up by 4ppts during FY11 to 33%
ITC’s RoE has now risen by 8ppts over the last two years to a 10-year high
RoE of 33%. RoEs are being driven up due to almost equal contribution from
higher margins and higher asset turns. The company has released cash from
working capital for the second year in a row now with core working capital
days reducing by 20% during FY11 (to 31 days).
FCF up 12%; dividend payout on a steady improvement
With capex kept under a reasonably tight control at less than 25% of PAT and
less than 2x depreciation for the last two years, FCF has closely tracked the
reported profit. ITC steadily raised the dividend payout from 30% in FY03 to
50% by FY06 and since then, it’s been steady but for the last two years
where the company paid special dividend. The average dividend payout ratio
for ITC over the last five years, hence, now works out to 72%.
ESOPs of 1%+ of equity understates the staff costs
FY11 was the fifth year in a row wherein ESOPs granted exceeded 1% of
outstanding capital. ITC’s annual report states that if the company had used
black-scholes model for valuing these options, the company’s reported
earnings would have been lower by 7%. ITC remains the most prolific issuer
of ESOPs among the FMCG coverage universe.
Widening of discount to FMCG peers unjustified
ITC has traded at 8% discount to FMCG sector valuations (excl HUL) over the
last 5 years. The discount has widened to 16% now. We believe that this is
unjustified especially as ITC continues to improve dividend payout and RoEs.
While an adverse tax action in certain states remains a near-term risk, we
believe that any potential weakness due to the same will be an opportunity to
buy. We continue to expect a buoyant cigarette volume growth of 7%+ during
FY12 to be a stock trigger.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Smoking out cash
ITC’s FY11 annual report highlights the improving trend in ITC’s capital
efficiencies. The company’s RoE is now at a 10 year high of 33% driven
by higher margins and improving trend in asset turns. With the special
dividends over the last two years, the 5-year average dividend payout
ratio works out to 72%, yet the company carries US$580m in cash. In
this context, we believe that the widening PE discount to FMCG peers is
unjustified. Any potential adverse tax action in certain states creating
stock weakness will be an opportunity to buy.
RoE moves up by 4ppts during FY11 to 33%
ITC’s RoE has now risen by 8ppts over the last two years to a 10-year high
RoE of 33%. RoEs are being driven up due to almost equal contribution from
higher margins and higher asset turns. The company has released cash from
working capital for the second year in a row now with core working capital
days reducing by 20% during FY11 (to 31 days).
FCF up 12%; dividend payout on a steady improvement
With capex kept under a reasonably tight control at less than 25% of PAT and
less than 2x depreciation for the last two years, FCF has closely tracked the
reported profit. ITC steadily raised the dividend payout from 30% in FY03 to
50% by FY06 and since then, it’s been steady but for the last two years
where the company paid special dividend. The average dividend payout ratio
for ITC over the last five years, hence, now works out to 72%.
ESOPs of 1%+ of equity understates the staff costs
FY11 was the fifth year in a row wherein ESOPs granted exceeded 1% of
outstanding capital. ITC’s annual report states that if the company had used
black-scholes model for valuing these options, the company’s reported
earnings would have been lower by 7%. ITC remains the most prolific issuer
of ESOPs among the FMCG coverage universe.
Widening of discount to FMCG peers unjustified
ITC has traded at 8% discount to FMCG sector valuations (excl HUL) over the
last 5 years. The discount has widened to 16% now. We believe that this is
unjustified especially as ITC continues to improve dividend payout and RoEs.
While an adverse tax action in certain states remains a near-term risk, we
believe that any potential weakness due to the same will be an opportunity to
buy. We continue to expect a buoyant cigarette volume growth of 7%+ during
FY12 to be a stock trigger.
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