Buy ITC:: Strong cash flows… �� Sustainable revenue growth • ICICI Securities,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Strong cash flows…
�� Sustainable revenue growth
• ITC is the largest cigarette and paperboard manufacturer and
second largest hotel company in India with ~70% market share in
cigarettes
• With the FMCG industry likely triple by growing at ~13.0% CAGR
by 2020 to | 4.0 lakh crore (source: CII), we believe ITC would
continue to grow at ~17% (grown 1.3x of industry in the last 10
years) with moderate volume growth and steady prices hikes
• We have seen sharp excise duty hikes on cigarettes in the past
that has not gone well to increase revenues for the government as
price hikes have taken a toll on volumes. Hence, the government
has gone soft on hikes. This would result in higher volume growth
compared to the last two or three years
• Cigarettes account for only 15% of the total tobacco consumption
in India. With the low per capita consumption of 99 sticks per
annum compared to other regional countries like Pakistan (~391),
Nepal (~274) and developed countries like US (~1196), Japan
(~2028). This presents a big opportunity for Indian companies. As
ITC is the largest play would garner the biggest chunk of the pie
• With 51.1% CAGR revenue growth in non-cigarette FMCG in the
last five years, losses have reduced substantially (| 331.5 crore in
FY11) after peaking to | 484 crore in FY09
�� Going ahead
• With the GDP growing at 8% per annum and per capital income
increasing to 1.3-1.4x in FY15 compared to FY11, volume growth
in cigarettes would continue to grow at 3-5% while EBIT would
grow at ~10-12% in the next five years
• With rising disposable incomes and increasing penetration for
branded food products (ITC largely present), the FMCG business
would continue to register double digit growth and start
contributing to EBITDA in the next two or three years. This would
augur well for the company
• Considering ITC’s lower susceptibility to raw material prices,
backward integration through agri-business and pricing power in
cigarettes would continue to help it maintain such high margins
Valuation
The stock has got re-rated gradually over the years compared to its
closest peer. With strong cash flows from the cigarette business, the
company has increased its dividend payout from ~28% in FY02 to ~80%
in FY11. With the expected break-even of the FMCG business, we believe
the stock would continue to command a premium compared to its peers.