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ITC Limited - Strong all-round growth to sustain; Buy
Where we are
ITC is currently on a strong growth path of mid-20s as it managed positive volume
growth in cigarettes despite heavy price hikes of 15% led by sharp rise in taxes.
All-round profitability is improving as cigarettes are benefiting from uptrading,
FMCG is seeing reduced losses, Papers are gaining from better mix and higher
prices, exports are benefiting from higher leaf tobacco prices, and Hotels are
seeing a revival in occupancy.
Where we are going
We expect the current strong growth momentum to sustain into 2011 as well. This
should be led by a bounce back in cigarette volumes as tax hikes should be
benign post the sharp jump in 2010. Also, margin improvement should sustain as
cigarettes benefit from lower input costs, FMCG gestation costs come down and
Hotels see improvement in average room rates on lower capacity addition.
Investment conclusion for 2011
We maintain our Buy rating on ITC. We believe ITC will maintain a healthy 21%
EPS CAGR over FY10-12E. Valuation at 21xFY12E pegs ITC 10% below the
sector average. This we believe leaves upside room on potential re-rating given
improved earnings growth trajectory. ITC is also the favored defensive in Indian
consumer space due to its strong and stable earnings growth, unleveraged
balance sheet, strong cash flows, and healthy returns on capital.
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