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C i g a r e t t e s: In j u r i o u s t o h e a l t h , n o t i n v e s tme n t s…
ITC is the largest cigarette manufacturer and among the largest
paperboard manufacturing companies in India. The company also has the
second largest hotel chain in the country and is aggressively acquiring a
strong position in the FMCG space. Being the market leader in cigarettes
(83% value share in FY11), it has strong pricing power and brand value
with a well established distribution network, thereby helping it to derive
strength in other businesses also. Further, an increasing dividend payout
over the years (from ~40% in FY06 to ~70% in FY11) has kept the return
ratios of ITC at a good stead and justifies the current valuations. We are
initiating coverage on the stock with a BUY rating.
ƒ Favourable revenue growth across all businesses
With a leading position in its various businesses, we expect ITC to sustain
its gross revenue growth at 12.6% CAGR in FY11-14E. This will be driven
by healthy growth in FMCG (18.6%), agri business (16.3%) and
paperboards (13.7%) with a moderate growth in cigarette (10.1%) and
hotel (8.8%) revenues. Over the last five years, the company’s gross
revenues have grown at 12.5% (CAGR F07-FY11) from | 21110.2 crore to
| 33802.2 crore. This growth was also led by expansion in revenues
across businesses with cigarettes (11.5%), FMCG (27.3%) and
paperboards (14.9%) being the growth drivers and hotel (2.2%) and agri
business (7.9%) revenues witnessing moderate growth.
ƒ Market leadership to continue driving revenues in cigarette
ITC is the market leader in the Indian cigarettes industry and enjoys ~75%
volume share (FY11). Its cigarette revenues (gross) have grown by ~1.5x,
from | 12833.7 crore in FY07 to | 19827.6 crore in FY11, largely driven by
price growth of 11.3% with volume growth remaining flat. Being a
dominant player, passing on the impact of higher taxes through price
increases has not been tough for ITC. Therefore, we expect revenues
from cigarettes to continue growing at a CAGR of 10.1% (FY11-14E)
driven by 5.3% price growth and a lower volume growth of 4.5%.
Valuation
Led by the diversified nature of ITC’s businesses we have valued it on
SOTP basis and arrived at a fair value of | 226/share. Our target price is
based on valuing cigarettes business at | 183.1/share, other businesses at
| 35.3/share and cash/share of | 8.1. Moreover, at CMP of | 204, the stock
is trading at 23.7x its FY13E and 20.1x its FY14E EPS of | 8.6 and | 10.1,
respectively. With the historic trading range for ITC being 15-28x and our
target P/E being 26x FY13E, our valuation is justified. Also, on the basis of
DCF valuation, we have arrived at the fair value of | 225 per share
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
C i g a r e t t e s: In j u r i o u s t o h e a l t h , n o t i n v e s tme n t s…
ITC is the largest cigarette manufacturer and among the largest
paperboard manufacturing companies in India. The company also has the
second largest hotel chain in the country and is aggressively acquiring a
strong position in the FMCG space. Being the market leader in cigarettes
(83% value share in FY11), it has strong pricing power and brand value
with a well established distribution network, thereby helping it to derive
strength in other businesses also. Further, an increasing dividend payout
over the years (from ~40% in FY06 to ~70% in FY11) has kept the return
ratios of ITC at a good stead and justifies the current valuations. We are
initiating coverage on the stock with a BUY rating.
ƒ Favourable revenue growth across all businesses
With a leading position in its various businesses, we expect ITC to sustain
its gross revenue growth at 12.6% CAGR in FY11-14E. This will be driven
by healthy growth in FMCG (18.6%), agri business (16.3%) and
paperboards (13.7%) with a moderate growth in cigarette (10.1%) and
hotel (8.8%) revenues. Over the last five years, the company’s gross
revenues have grown at 12.5% (CAGR F07-FY11) from | 21110.2 crore to
| 33802.2 crore. This growth was also led by expansion in revenues
across businesses with cigarettes (11.5%), FMCG (27.3%) and
paperboards (14.9%) being the growth drivers and hotel (2.2%) and agri
business (7.9%) revenues witnessing moderate growth.
ƒ Market leadership to continue driving revenues in cigarette
ITC is the market leader in the Indian cigarettes industry and enjoys ~75%
volume share (FY11). Its cigarette revenues (gross) have grown by ~1.5x,
from | 12833.7 crore in FY07 to | 19827.6 crore in FY11, largely driven by
price growth of 11.3% with volume growth remaining flat. Being a
dominant player, passing on the impact of higher taxes through price
increases has not been tough for ITC. Therefore, we expect revenues
from cigarettes to continue growing at a CAGR of 10.1% (FY11-14E)
driven by 5.3% price growth and a lower volume growth of 4.5%.
Valuation
Led by the diversified nature of ITC’s businesses we have valued it on
SOTP basis and arrived at a fair value of | 226/share. Our target price is
based on valuing cigarettes business at | 183.1/share, other businesses at
| 35.3/share and cash/share of | 8.1. Moreover, at CMP of | 204, the stock
is trading at 23.7x its FY13E and 20.1x its FY14E EPS of | 8.6 and | 10.1,
respectively. With the historic trading range for ITC being 15-28x and our
target P/E being 26x FY13E, our valuation is justified. Also, on the basis of
DCF valuation, we have arrived at the fair value of | 225 per share
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