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All businesses on an upswing
ITC’s earnings grew strongly at 24% YoY. While EBITDA growth at 16.5% YoY was ahead of
estimates, the even higher PAT growth was a result of 74% YoY jump in other income. Cigarette
volume decline was c0.5% YoY as compared to 3% YoY decline in 1QFY11. We expect volumes to
grow YoY hereon and close with FY11 volume growth at 1-2% YoY. Other FMCG continued reporting
declining losses, lower by 21% YoY and 23% QoQ. The paper business saw very strong margin growth
as realizations were higher YoY. We increase earnings estimates for FY11-13 by 3-4% to factor in
higher cigarette margins and lower FMCG losses and revise target price to Rs191. Retain BUY.
Cigarette volumes pick up; raw material price decline will help margin expansion in FY12:
grow YoY from hereon. King size cigarettes grew well ahead of the overall cigarette volumes. Cigarette EBIT
margin has expanded 65bps YoY in 1HFY11 as against our expectations of flat margins. ITC has procured
large portion of the tobacco for the FY12 cigarette production, which has come at a 5-10% YoY lower price
as compared to a 20% YoY higher price for FY11. This would help FY12 cigarette EBIT margin expansion.
Other FMCG, paper delivers strong results: Other FMCG losses came in lower 23% QoQ, as the foods
business saw increased profits from price hikes in staples and biscuits. This is the 3rd consecutive quarter of
profits in foods. Paper margins expanded 295bps YoY on higher realizations. Higher pulp prices forced paper
manufacturers to increase prices and ITC followed. As pulp is captive for ITC its margins expanded.
Other income growth not sustainable: The 74% YoY increase in other income included sale of
investments in Agrotech. Also some investments have been transferred from ITC’s 100% subsidiary to the
parent balance sheet and hence dividend income from these reflect in the standalone results this quarter.
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