ITC (ITC.BO)
Buy Equity Research
In line with expectations: Higher cigarette margins, lower volumes
What surprised us
ITC reported 1QFY14 gross sales of Rs 107 bn (+13% yoy) and EBIT of
Rs25.8 bn (+19% yoy, 1% above GSe). Key takeaways from 1Q resulst: 1)
We estimate 1Q cigarette volume declined about 2%. Adjusted for VAT
hikes of around 300 bp yoy, we estimate price increases of 15-16% yoy,
leading to gross sales of Rs68.8 bn (14% yoy). Excise increase of 21% is
attributed to higher proportion of lower excise duty cigarettes in 1QFY13.
2) Cigarette margins were up 124bps yoy (81bps above GSe) due to price
increases, better cost management, and lower promotion expenses. 3)
FMCG (Others) registered growth of 18% yoy (-3% GSe). It reported a
minor operating loss of Rs 0.2bn after breaking even in 4QFY13. 4) Other
businesses. Agri-business reported robust sales growth of 29% yoy (+12%
vs GSe) due to higher sales of wheat and leaf tobacco. Hotel business was
weak with sales growth of 8% yoy (-9% vs GSe) while paper business
reported growth of 12% (+1% vs GSe). 5) ITC has expanded its product
portfolio in sub-65mm category by launching 3 products—'Flake Galaxy',
'Flake Liberty' & 'Silk Cut Virginia'— in identified markets in the quarter,
looking to arrest the growth of illegal cigarettes.
What to do with the stock
We raise our FY14-16E EPS estimates by 0%-3% to reflect higher-thanexpected cigarette margins. Consequently, we raise our SOTP-based 12-m
TP to Rs 368 (from Rs 361). We continue to value the FMCG (others)
business separately at 2X FY15E sales, in line with sector average multiple,
and the other business at 26X FY15E EPS. ITC trades at 26.8x FY15E EPS vs
our sector average of 30x despite higher EPS growth of 19.3% over FY13-
15E /s 15.8% for Indian consumer sector. Key risks: higher taxation.
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Buy Equity Research
In line with expectations: Higher cigarette margins, lower volumes
What surprised us
ITC reported 1QFY14 gross sales of Rs 107 bn (+13% yoy) and EBIT of
Rs25.8 bn (+19% yoy, 1% above GSe). Key takeaways from 1Q resulst: 1)
We estimate 1Q cigarette volume declined about 2%. Adjusted for VAT
hikes of around 300 bp yoy, we estimate price increases of 15-16% yoy,
leading to gross sales of Rs68.8 bn (14% yoy). Excise increase of 21% is
attributed to higher proportion of lower excise duty cigarettes in 1QFY13.
2) Cigarette margins were up 124bps yoy (81bps above GSe) due to price
increases, better cost management, and lower promotion expenses. 3)
FMCG (Others) registered growth of 18% yoy (-3% GSe). It reported a
minor operating loss of Rs 0.2bn after breaking even in 4QFY13. 4) Other
businesses. Agri-business reported robust sales growth of 29% yoy (+12%
vs GSe) due to higher sales of wheat and leaf tobacco. Hotel business was
weak with sales growth of 8% yoy (-9% vs GSe) while paper business
reported growth of 12% (+1% vs GSe). 5) ITC has expanded its product
portfolio in sub-65mm category by launching 3 products—'Flake Galaxy',
'Flake Liberty' & 'Silk Cut Virginia'— in identified markets in the quarter,
looking to arrest the growth of illegal cigarettes.
What to do with the stock
We raise our FY14-16E EPS estimates by 0%-3% to reflect higher-thanexpected cigarette margins. Consequently, we raise our SOTP-based 12-m
TP to Rs 368 (from Rs 361). We continue to value the FMCG (others)
business separately at 2X FY15E sales, in line with sector average multiple,
and the other business at 26X FY15E EPS. ITC trades at 26.8x FY15E EPS vs
our sector average of 30x despite higher EPS growth of 19.3% over FY13-
15E /s 15.8% for Indian consumer sector. Key risks: higher taxation.
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