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Underlying volume growth remains healthy at 7-8% for 2QFY12. Despite the cigarette price hikes
to counter the VAT hikes in key states, weighted average price hike was below inflation, and
hence unlikely to impact volume momentum in our view. Other FMCG business shows improving
trend. Maintain Buy.
Cigarette and other FMCG businesses continue to deliver growth
ITC achieved gross revenue growth of 16.8% yoy in 2QFY12, with the cigarette business
achieving 14.0% yoy growth, other FMCG at 27.2%, hotels at 4.3%, agri-business at 14.8%,
and paper business at 10.1%.
Sales growth in the cigarettes business was in line with our expectation, with 7-8% yoy
underlying volume growth. VAT hikes in different states are factored in the price hikes taken
in 2QFY12.
ITC’s EBITDA at Rs21.1bn grew 17.8% yoy and 11.9% qoq. EBITDA margin remained flat
yoy at 35.3% for 2QFY12. Sequentially margins improved 263bps qoq from 32.7% in
1QFY12, due to 105bps reduction in the raw material costs to sales (38.8% in 2QFY12) and
240bps reduction in employee costs to sales (4.4% of sales in 2QFY12).
EBIT margins expand across segments
EBIT growth remained strong across all of ITC's key businesses in 2QFY12. Cigarette
business EBIT grew 18.6% yoy, with margin improving 120bps yoy and 160bps qoq to 31.5%
in 2QFY12.
Other FMCG segment showed robust growth with better than expected sales of Rs13.4bn
(6% ahead of our expectation). Volume growth for most of the categories remained in high
teens led by with new launches and products extensions in across the businesses. The
company expects the trend to continue. EBIT in other FMCG losses decreased 16% yoy from
1QFY12 levels, but we expect losses in the rest of FY12. Effective cost management, better
market servicing and smart commodity procurement led to improvement in profitability.
In paper business, capacity remains an issue. New capacity additions in next years should
resolve this. Paper business margin improved 183bps yoy and 498bps qoq to 27.4% in
2QFY12, driven by better realisations, richer mix and higher volumes.
The hotel business recorded lower-than-expected revenue growth, due to the economic
turmoil in Europe and US, the two key source markets and slow down of the Indian economy.
Low demand and significant additions to supply in key markets, led to the challenging time for
hospitality industry. However, we expect the business to pickup in the second half. Hotel
margin reduced 178bps qoq to 18.5%, but remained 80bps higher than 17.7% in 2QFY11.
Agri-business grew 18% yoy driven by higher trading volumes and improved realisations in
soya, wheat and coffee. EBIT margin improving significantly 744bps qoq to 16.6% in 2QFY12.
Earnings outlook remains strong
ITC has faced sharp hikes in Value Added Tax (VAT) rates in a few states like Tamil Nadu,
West Bengal and Andhra Pradesh, where VAT rates were raised from 13-14% to 20%. These
states are significant contributors to ITC's revenues, and hence, ITC has been forced to raise
prices to neutralise the impact. It may be recalled that ITC had raised prices of Classic and
Goldflake Kings in August 2011, and Wills Navy Cut in September 2011.
While the recent VAT hikes in various states put pressure on ITC on the margin, we believe
that growing awareness of the health hazards from non-cigarette forms of tobacco, plus
restrictions on packaging and increased taxation of products like gutkha, zarda and chewing
tobacco create a long term positive. Cigarettes constitute just 15% of India’s tobacco
consumption, so we see great potential for this to increase.
We expect ITC to record 6-7% volume growth in FY12. This recovery has to be viewed in the
context of the 2.8% decline that ITC recorded in FY11 due to sharp price hikes driven by a
17% excise duty hike. Our channel checks reveal that ITC’s premium cigarette segment
revenues are growing faster than the company’s overall growth. ITC's other FMCG business
could be the next value driver as the business is reaching a critical scale in many segments.
We expect the business to breakeven in FY13 and turn profitable beyond that.
ITC has achieved an EPS of Rs3.67 in 1HFY12; we remain comfortable with FY12F EPS of
Rs7.75. We view the company’s strong cash generation capability and its stable earnings
momentum, and the favorable impact of rupee depreciation as major positives. At its current
market price of Rs204, the stock trades at 26.3x FY12F EPS of Rs7.75 and 22.1x FY13F
EPS of Rs9.21. Maintain Buy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Underlying volume growth remains healthy at 7-8% for 2QFY12. Despite the cigarette price hikes
to counter the VAT hikes in key states, weighted average price hike was below inflation, and
hence unlikely to impact volume momentum in our view. Other FMCG business shows improving
trend. Maintain Buy.
Cigarette and other FMCG businesses continue to deliver growth
ITC achieved gross revenue growth of 16.8% yoy in 2QFY12, with the cigarette business
achieving 14.0% yoy growth, other FMCG at 27.2%, hotels at 4.3%, agri-business at 14.8%,
and paper business at 10.1%.
Sales growth in the cigarettes business was in line with our expectation, with 7-8% yoy
underlying volume growth. VAT hikes in different states are factored in the price hikes taken
in 2QFY12.
ITC’s EBITDA at Rs21.1bn grew 17.8% yoy and 11.9% qoq. EBITDA margin remained flat
yoy at 35.3% for 2QFY12. Sequentially margins improved 263bps qoq from 32.7% in
1QFY12, due to 105bps reduction in the raw material costs to sales (38.8% in 2QFY12) and
240bps reduction in employee costs to sales (4.4% of sales in 2QFY12).
EBIT margins expand across segments
EBIT growth remained strong across all of ITC's key businesses in 2QFY12. Cigarette
business EBIT grew 18.6% yoy, with margin improving 120bps yoy and 160bps qoq to 31.5%
in 2QFY12.
Other FMCG segment showed robust growth with better than expected sales of Rs13.4bn
(6% ahead of our expectation). Volume growth for most of the categories remained in high
teens led by with new launches and products extensions in across the businesses. The
company expects the trend to continue. EBIT in other FMCG losses decreased 16% yoy from
1QFY12 levels, but we expect losses in the rest of FY12. Effective cost management, better
market servicing and smart commodity procurement led to improvement in profitability.
In paper business, capacity remains an issue. New capacity additions in next years should
resolve this. Paper business margin improved 183bps yoy and 498bps qoq to 27.4% in
2QFY12, driven by better realisations, richer mix and higher volumes.
The hotel business recorded lower-than-expected revenue growth, due to the economic
turmoil in Europe and US, the two key source markets and slow down of the Indian economy.
Low demand and significant additions to supply in key markets, led to the challenging time for
hospitality industry. However, we expect the business to pickup in the second half. Hotel
margin reduced 178bps qoq to 18.5%, but remained 80bps higher than 17.7% in 2QFY11.
Agri-business grew 18% yoy driven by higher trading volumes and improved realisations in
soya, wheat and coffee. EBIT margin improving significantly 744bps qoq to 16.6% in 2QFY12.
Earnings outlook remains strong
ITC has faced sharp hikes in Value Added Tax (VAT) rates in a few states like Tamil Nadu,
West Bengal and Andhra Pradesh, where VAT rates were raised from 13-14% to 20%. These
states are significant contributors to ITC's revenues, and hence, ITC has been forced to raise
prices to neutralise the impact. It may be recalled that ITC had raised prices of Classic and
Goldflake Kings in August 2011, and Wills Navy Cut in September 2011.
While the recent VAT hikes in various states put pressure on ITC on the margin, we believe
that growing awareness of the health hazards from non-cigarette forms of tobacco, plus
restrictions on packaging and increased taxation of products like gutkha, zarda and chewing
tobacco create a long term positive. Cigarettes constitute just 15% of India’s tobacco
consumption, so we see great potential for this to increase.
We expect ITC to record 6-7% volume growth in FY12. This recovery has to be viewed in the
context of the 2.8% decline that ITC recorded in FY11 due to sharp price hikes driven by a
17% excise duty hike. Our channel checks reveal that ITC’s premium cigarette segment
revenues are growing faster than the company’s overall growth. ITC's other FMCG business
could be the next value driver as the business is reaching a critical scale in many segments.
We expect the business to breakeven in FY13 and turn profitable beyond that.
ITC has achieved an EPS of Rs3.67 in 1HFY12; we remain comfortable with FY12F EPS of
Rs7.75. We view the company’s strong cash generation capability and its stable earnings
momentum, and the favorable impact of rupee depreciation as major positives. At its current
market price of Rs204, the stock trades at 26.3x FY12F EPS of Rs7.75 and 22.1x FY13F
EPS of Rs9.21. Maintain Buy.
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