Weak sales across segments… • ITC :: ICICI Securities

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Weak sales across segments…
• ITC posted disappointing numbers with sales growth of 2.1% to
| 8800.2 crore led by mere 1% growth in cigarettes and 5% growth
in hotels segment. However, the FMCG segment saw relatively better
revenue growth of 11% with strong growth in atta and noodles.
However, biscuits, apparels and matchsticks remain a drag
• Cigarette volumes saw a significant dip of ~15-16% with price hike
of ~16-17% to pass on the excise hike & VAT increases during FY15
• The agri segment witnessed 11% revenue dip with lower soya
exports as US witnessed a robust crop. Paper business revenues
declined 5% impacted by slowdown in cigarettes & FMCG industries
• The company reported a 110 bps expansion in operating margins as
the company has taken 15-17% price hikes in cigarettes. PAT
increased 10.5% to | 2635 crore (I-direct estimate: | 2590.5 crore) led
by higher EBITDA and 49% increase in other income
Cigarette volumes to remain dismal
ITC, the undisputed leader in cigarettes in India (~75% share by volume
in FY12), has been witnessing decline in volumes since the beginning of
FY14E. The strain on volumes (down 4% in FY14E) was largely led by
incessant price hikes taken to pass on the increasing excise duty in above
64 mm sticks in the last two years (~18% in 2012 Budget and ~20% in
2013 Budget). In the 2014 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 would entail an excise hike of
~21%, going forward. Hence, with the third consecutive year of hike, we
believe cigarettes volumes would continue to remain under pressure.
Hence, we estimate a decline of 6.5% in volumes for FY15E (price hike of
~22%) & further 4% decline in FY16E and FY17E (~12% price hike in
FY16E & FY17E). 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 regulatory restriction on cigarettes consumption.
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 in
growing its FMCG business. We have modelled revenue CAGR of 16.5%
from 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 volumes and slower growth in
other businesses (FMCG, hotels and paperboards), we maintain a
cautious stand in near term. We value ITC on an SOTP basis and maintain
our target price of | 387/share. We assign a HOLD rating to the stock.

LINK
http://content.icicidirect.com/mailimages/IDirect_ITC_Q3FY15.pdf