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ITC (ITC)
Consumer products
Keeps the date, again. Good growth in cigarettes and margin expansion of 130 bps
to 31.5% are key positives. The growth in excise (difference between gross and net
sales) of ~11% is entirely volume growth and mix improvement (Exhibit 1), in our view.
Overall results were in line. Potential to implement further price increases in cigarettes
in 2HFY12E exists (which could create buffer for FY2013E). However, we agree with
investors that absolute returns in the ITC stock in the near term could potentially be
constrained because of the taxation overhang. Retain ADD.
Cigarette volume and mix growth of 11%
ITC reported net sales of Rs59.7 bn (+18%, KIE Rs59.1 bn), EBITDA of Rs21.1 bn (+18%, KIE
Rs21.3 bn) and PAT of Rs15.1 bn (+25%, KIE Rs14.5 bn).
Segment sales. Cigarette sales growth of 14% was driven by volume growth of ~9%. The
volume growth is partly driven by favorable base effect (cigarette volumes were flat in 2QFY11).
Other FMCG sales grew by 27% driven by stationery, personal care and packaged foods
business – biscuits, staples and snacks. Higher soya, coffee and wheat sales led to 15% sales
growth in the agri business. Hotel sales grew by 4% and paperboard segment sales grew by
+10%.
Segment PBIT margins. Cigarette margins improved 130 bps to 31.5% likely on account of
the benefit of the price hike taken in YTDCY2011 (in line with expectations), mix improvement,
phasing benefit of certain costs and likely higher trade promotions in base (Marlboro-linked
trade expenses in base, in our view). Other FMCG margin improved by 16% (lower losses) – all
segments of the packaged foods business are now profitable, including snacks. The quarter
likely had launch expense of Vivel skin care (expanding the product reach), men’s grooming
range under Fiama Di Wills brand and continuing spends on talcum powder under Fiama brand.
Other income increased +39% on account of higher cash position and higher yields. Staff costs
were flat yoy due to phasing of expenses. Working capital (WC) is flat qoq at Rs143 bn. We
note that ITC had higher WC in 1QFY12 due to strategic stocking, higher unit prices of
inventories etc.
Retain ADD; earnings visibility and potential for increase in payout are positives
Our earnings estimates are broadly maintained (EPS of Rs7.9 and Rs9.0 for FY2012E and
FY2013E, respectively); maintain ADD rating and TP of Rs230. We value ITC on P/E (25X) as
our underlying themes on ITC are intact, (1) strong EPS CAGR of ~18% over FY2011-13E,
(2) sustaining strong trends in cigarettes, (3) likely improvement in RoCE and (4) higher
dividend payout. Key risks are (1) unexpected higher losses in other FMCG, and (2) any
aggressive marketing strategy (including trade discounting) by Philip Morris to promote
Marlboro.
What to look for in FY2012-13E?
Impact of pictorial warnings slated to be released in India in December 2011.
Any global developments in the tobacco industry and their rub-off effect on India – (1)
proposal for plain packaging on cigarette packs in Australia, and (2) harsh set of graphic
warnings to be introduced on cigarette packs in US from September 2012.
Any increase in VAT on cigarettes by State governments (in FY2013E) where the rates are
at the lower-end of 12.5%. Current weighted average VAT impact for ITC is ~17%.
Moreover, the likelihood of increase in excise duty in the Central budget of February,
2012 is high considering that cigarette excise was not increased in two out of last three
years.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ITC (ITC)
Consumer products
Keeps the date, again. Good growth in cigarettes and margin expansion of 130 bps
to 31.5% are key positives. The growth in excise (difference between gross and net
sales) of ~11% is entirely volume growth and mix improvement (Exhibit 1), in our view.
Overall results were in line. Potential to implement further price increases in cigarettes
in 2HFY12E exists (which could create buffer for FY2013E). However, we agree with
investors that absolute returns in the ITC stock in the near term could potentially be
constrained because of the taxation overhang. Retain ADD.
Cigarette volume and mix growth of 11%
ITC reported net sales of Rs59.7 bn (+18%, KIE Rs59.1 bn), EBITDA of Rs21.1 bn (+18%, KIE
Rs21.3 bn) and PAT of Rs15.1 bn (+25%, KIE Rs14.5 bn).
Segment sales. Cigarette sales growth of 14% was driven by volume growth of ~9%. The
volume growth is partly driven by favorable base effect (cigarette volumes were flat in 2QFY11).
Other FMCG sales grew by 27% driven by stationery, personal care and packaged foods
business – biscuits, staples and snacks. Higher soya, coffee and wheat sales led to 15% sales
growth in the agri business. Hotel sales grew by 4% and paperboard segment sales grew by
+10%.
Segment PBIT margins. Cigarette margins improved 130 bps to 31.5% likely on account of
the benefit of the price hike taken in YTDCY2011 (in line with expectations), mix improvement,
phasing benefit of certain costs and likely higher trade promotions in base (Marlboro-linked
trade expenses in base, in our view). Other FMCG margin improved by 16% (lower losses) – all
segments of the packaged foods business are now profitable, including snacks. The quarter
likely had launch expense of Vivel skin care (expanding the product reach), men’s grooming
range under Fiama Di Wills brand and continuing spends on talcum powder under Fiama brand.
Other income increased +39% on account of higher cash position and higher yields. Staff costs
were flat yoy due to phasing of expenses. Working capital (WC) is flat qoq at Rs143 bn. We
note that ITC had higher WC in 1QFY12 due to strategic stocking, higher unit prices of
inventories etc.
Retain ADD; earnings visibility and potential for increase in payout are positives
Our earnings estimates are broadly maintained (EPS of Rs7.9 and Rs9.0 for FY2012E and
FY2013E, respectively); maintain ADD rating and TP of Rs230. We value ITC on P/E (25X) as
our underlying themes on ITC are intact, (1) strong EPS CAGR of ~18% over FY2011-13E,
(2) sustaining strong trends in cigarettes, (3) likely improvement in RoCE and (4) higher
dividend payout. Key risks are (1) unexpected higher losses in other FMCG, and (2) any
aggressive marketing strategy (including trade discounting) by Philip Morris to promote
Marlboro.
What to look for in FY2012-13E?
Impact of pictorial warnings slated to be released in India in December 2011.
Any global developments in the tobacco industry and their rub-off effect on India – (1)
proposal for plain packaging on cigarette packs in Australia, and (2) harsh set of graphic
warnings to be introduced on cigarette packs in US from September 2012.
Any increase in VAT on cigarettes by State governments (in FY2013E) where the rates are
at the lower-end of 12.5%. Current weighted average VAT impact for ITC is ~17%.
Moreover, the likelihood of increase in excise duty in the Central budget of February,
2012 is high considering that cigarette excise was not increased in two out of last three
years.
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