ITC (3QFY15) : Retain faith. Maintain BUY :: HDFC Securities

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Retain faith
ITC’s overall revenues increased 2.5% YoY to Rs
89.4bn (below est). Cigarettes delivered flat net sales
YoY (implied volume decline of ~12%). Key negatives
are [1] Cigarettes delivered 8.8% YoY EBIT growth (vs
12.2% in 2QFY15) [2] Muted sales growth witnessed
in hotels (4.7% YoY), Agri (10.6% YoY decline) and
Paper (4.7% YoY decline) [3] Ex cigarette and Agri
business, other businesses witnessed a margin
contraction. Key positives are [1] FMCG witnessed
robust sales growth of 11.4% YoY and it broke even
with 10.7% YoY EBIT growth [2] ITC's EBITDA margin
expanded 110bps YoY to 38.7% aided by lower COGS
and other expenses (but EBITDA remains below
estimate). APAT at Rs26.4bn witnessed a 10.5%
growth (above est) led by a surge in other income.
We believe cigarettes will witness a structural
change in India over the longer term (driven by
demographics, upgrading from beedis, chewing
tobacco ban). However, a harsher regulatory regime
and punitive taxation (excise and VAT) will keep
volume growth under pressure in the near term.
FMCG business continues to gain market share on
the back of resilient volume growth. The stock will
remain under pressure till the upcoming Union
Budget (Feb 2015). Retain BUY with a TP of Rs 402.
Lowest cigarettes EBIT growth in 23 quarters
 ITC’s operating revenues grew 2.5% YoY to ~Rs 89.4bn.
Its cigarette net sales remained flat (vs 14.2% YoY
growth in 2QFY15). Cigarette margins expanded
524bps YoY to 69.7%.
 FMCG business delivered a resilient 11.4% YoY sales
growth (vs 11.9% in 2QFY15), breaking even with a
10.7% YoY EBIT growth. While Hotels sales rose 4.7%,
profits were down 53.8%, driven by a 1,103bps YoY
margin contraction. Agri business sales declined 10.6%,
whereas profit rose 16.3% YoY. Paper business EBIT degrew
by 7.7% as margins contracted 58bps YoY.
EBIDTA margin expanded 110bps
 EBITDA margin expanded 110bps YoY to 38.7%, led by
lower COGS (-52bps) and other expenses (-67bps). This
was partially offset by higher staff cost (+9bps). Driven
by higher other income (up 48.8% YoY), APAT grew
10.5% YoY to ~Rs 26.4bn (above est).
Valuations and view
 BUY with SOTP based one year TP of Rs 402, implying
21.2x FY17E EPS.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010869