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Action: Reiterate Buy on continuing delivery in cigarette business
While the regulatory environment has been uncertain, with large increases
in excise duty in both FY10 and FY12 budgets, ITC has been able to pass
on these price increases to consumers and deliver robust revenue and
earnings growth. This has been the case for the last 6-8 years, and we
believe ITC will continue to deliver mid to high teens earnings growth,
even if there remains some uncertainly on the regulatory front. Given this
resilience which the company has demonstrated, we believe ITC should
continue to be a core holding in the Indian consumer sector. Reiterate
BUY with an increased TP of INR 310.
Catalysts: FMCG business reaching break-even
ITC has been investing a significant sum in building a consumer goods
business over the last decade or so. This segment, called FMCG, now has
revenues of INR55bn+, which makes it the second largest in the country
by sales. This business is now likely to break even in the next 4-5
quarters, which will be a significant positive for ITC, we believe.
Valuation: ITC trades at 24.5x FY14F
ITC trades at 24.5x FY14F earnings vs the sector market-cap-weighted
average of 27x and Hindustan Unilever at 31.7x. We expect ITC to deliver
average earnings growth of 17-18% over the next couple of years, largely
in line with the sector average, so we expect the valuation gap to close.
We have increased our valuation multiple for the core cigarette business
from 23x to 25x, and our increased SoTP valuation of INR310 gives 16%
upside from current levels.
Action: Reiterate Buy on continuing delivery in cigarette business
While the regulatory environment has been uncertain, with large increases
in excise duty in both FY10 and FY12 budgets, ITC has been able to pass
on these price increases to consumers and deliver robust revenue and
earnings growth. This has been the case for the last 6-8 years, and we
believe ITC will continue to deliver mid to high teens earnings growth,
even if there remains some uncertainly on the regulatory front. Given this
resilience which the company has demonstrated, we believe ITC should
continue to be a core holding in the Indian consumer sector. Reiterate
BUY with an increased TP of INR 310.
Catalysts: FMCG business reaching break-even
ITC has been investing a significant sum in building a consumer goods
business over the last decade or so. This segment, called FMCG, now has
revenues of INR55bn+, which makes it the second largest in the country
by sales. This business is now likely to break even in the next 4-5
quarters, which will be a significant positive for ITC, we believe.
Valuation: ITC trades at 24.5x FY14F
ITC trades at 24.5x FY14F earnings vs the sector market-cap-weighted
average of 27x and Hindustan Unilever at 31.7x. We expect ITC to deliver
average earnings growth of 17-18% over the next couple of years, largely
in line with the sector average, so we expect the valuation gap to close.
We have increased our valuation multiple for the core cigarette business
from 23x to 25x, and our increased SoTP valuation of INR310 gives 16%
upside from current levels.
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