Volume headwind across segments • ITC :: ICICI Securities, PDF link

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Volume headwind across segments
• ITC posted moderate revenue growth of 14.8% to | 8930.3 crore led
by 14.2% and 16.1 growth in cigarettes and agri segment
respectively. The FMCG segment witnessed a subdued 11.9%
revenue growth whereas growth in the hotels & paper segment
continued to remain muted at 5.9% and 8.9%, respectively
• Cigarettes volumes witnessed de-growth of ~4% on expected lines
after the third consecutive hike in excise duty earlier in July 2014. We
believe the proportion of 64 mm category has been lower after the
steep 72% increase in excise duty. Volume growth in the FMCG
segment continues to remain dismal at ~5-7% in the quarter
• EBITDA margins dipped 170 bps to 38.7% as the FMCG business
continues to make losses at | 10.0 crore & the hotels business
slipped into losses at | 9.6 crore. Net profit for the quarter, thereby,
increased by a dismal 8.7% YoY to | 2425.2 crore
Cigarette volumes to remain subdued
ITC, the undisputed leader in cigarettes in India (~75% share by volume
in FY12), has been witnessing a moderation in volume growth since the
beginning of FY14E. The strain on volumes (-4% in FY14E) was largely led
by incessant price hikes taken to pass on the increasing excise duty by
the government in above 64 mm sticks in the last two years (~18% in
2012 Budget and ~20% in 2013 Budget). In the FY15E Budget, however,
the government increased the excise on 64 mm segment by ~72% and
on all other length of cigarettes by 11-22%. ITC’s sales mix is expected to
entail an excise hike of ~21%, going forward. Hence, with the third
consecutive year of excise hike, we believe cigarette volumes would
continue to remain muted. Hence, we estimate a decline of 5% in
volumes for FY15E (price hike of ~21%), flat volumes for FY16E (~12%
price hike) and 1% growth in FY17E (~12% price hike). Further, we
believe ITC would refrain from increasing the contribution of 64 mm
(contribution in FY14E was 11-12%) following the significant excise hike
in FY15E. We also believe the government’s hawkish stance on curbing
tobacco consumption could lead to continuous excise hikes in future,
which would haunt cigarettes volumes, going forward.
Strengthening presence in FMCG
ITC plans to stimulate the distribution strategy for its FMCG business by
increasing its direct reach to ~1 lakh villages in India. These 1 lakh
villages account for ~80% of rural consumption. This initiative depicts
ITC’s aggressive approach towards growing its FMCG business, which
currently accounts for ~25% of its net sales (FY14) in comparison to
~16% in FY08. ITC’s growth from the segment has been phenomenal at
~22% CAGR in FY08-14. With the FMCG sector witnessing a continuous
slowdown in volumes (ITC’s volume growth has dipped from 16-18%
until Q4FY12 to 5-7% in Q2FY15), this initiative would be a shot in the arm
for ITC. Further, we believe that with continuous regulatory pressure and
belligerent price hikes in cigarettes, ITC would be far more aggressive to
grow its FMCG business. We have modelled revenue CAGR of 16.5% in
FY14-17E clocking revenues of | 12850 crore by FY17E.
Near term slowdown keeps us cautious; maintain our target
Led by near term concerns over cigarette volume growth and slower
growth in other businesses (FMCG, hotels and paperboards), we maintain
a cautious stand for the near term. We value the stock on an SOTP basis
and maintain our target price of | 387. We maintain HOLD rating.

LINK
http://content.icicidirect.com/mailimages/IDirect_ITC_Q2FY15.pdf