ITC: Results buoyant on higher agri, paper profits : HSBC

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ITC
N: Results buoyant on higher agri, paper profits
 Q2 FY11 sales growth at 16.3% in line with estimates, but
PAT at INR12.5bn, c6% above our estimates
 Surprise due to higher paper, agri profits, which is volatile;
cigarettes business sales and PAT in line
 We are Neutral on ITC, valued at INR180 on SOTP basis

Results surprise, but core categories in line: ITC reported Q2 FY11 results today. Sales
at INR50.6bn were in line with our and consensus estimates, but PAT at INR12.5bn
(23.5% yoy growth) beat our estimates by c6%. The surprise was mainly on account of
higher than anticipated profits in the agri and paper business. These categories are volatile
in nature, hence while the results are good we would not be overly excited. The core
cigarettes business was in line with our estimates both on top-line and bottom-line with a
volume growth between -1% and 0%. FMCG sales growth at 22.2% was lower than our
growth estimate of 30% but losses were lower at INR669 vs. our estimate of INR800.
Hotels business did well but a bit below our estimates on top and bottom-line.

Stable growth for the next two quarters: We expect stable growth for the next two
quarters from ITC and would put it as one of the least risky FMCG stocks to hold for the
next three to six months. The risk of competition from Marlboro Compact exists, but we
believe it will take time for Marlboro to take share from ITC, hence it is a long term
negative but no impact near term. Going into Q3 and Q4, we expect cigarette volumes to
turn positive and FMCG business to continue to increase sales with similar losses. The
other main event impacting ITC is the next union budget at the end of February and
concerns on that may cap the upside post December, but we expect ITC to retain its
defensive characteristics.

Valuation: We value ITC on SOTP basis. (all PE multiples based on Sep 2012e EPS).
Cigarettes: INR138 at 22x, a slight premium to global peers adjusting for higher growth
rates and ROE; Hotels: INR8, at 20x; Agribusiness: INR3, at 6x; paperboards: INR5, at
5x; FMCG others: INR16, at 2x sales and cash at INR10/share