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ITC Limited
Firing on all cylinders; Buy
„Strong quarter outperformance; reiterate Buy
ITC reported robust 25% yoy growth in Q1 profits, beating estimates by 4%. While
revenue grew 21% yoy, sharp volume growth in cigarettes and a consistent gain in
FMCG margins were the key highlights. Post Q1, we reiterate our Buy, with a PO of
Rs235. We also see upside risk from higher-than-expected growth in cigarettes.
Volumes and better mix drive outperformance in cigarettes
Revenue from cigarettes grew 16% yoy, which we believe was a result of i) 8% to
9% volume growth (vs. 7% estimated), ii) ~4.5% price increase and iii) better mix.
This drove the 21%yoy growth in segmental EBIT and a margin jump of 230bps
that was also led by benign pricing in tobacco. We expect robust performance in
cigarettes to continue through FY12 and see upside risk to estimates from this.
The rest of the segments also posted robust numbers
FMCG revenue grew 20%yoy, along with 254bps margin improvement. Margins
have continued to improve in this segment since Q1FY09. Also, while ITC is
investing in the ‘personal care’ segment, ‘snacks’ are likely close to breaking even.
Revenue from hotels grew 10%, along with a ~390bps margin jump, which we
believe was because of higher room rents and improving occupancies. EBIT from
both agribusiness and paper grew ~20% on the back of strong revenue growth.
Attractive valuations: lower monsoon risks, improving RoE
ITC trades at 22.5xFY13e PE for ~19% earnings CAGR. We believe this is
attractive, given (1) an improving earnings profile, as reflected by the 5% jump in
return ratios, (2) successful diversification and (3) lower monsoon-led risks vs.
peers. Our PO of INR235 is based on DCF and implies one-year fwd P/E of 24x.
Price objective basis & risk
ITC Limited (ITCTF)
We value ITC on Discounted Cash Flow basis and validate PO with Sum of the
Parts (SOTP) where we compare cigarettes business to international cigarettes
comparable peer and FMCG, Hotels and Paper business with Indian industry
peers. Our DCF based PO of Rs235 is in line with SOTP. PO implies a 1yr fwd
multiple of 24x at a higher end of historical trading range for ITC. We believe this
is justified given improving return ratios, sustained dividend payout and
successful diversification.
Risks: (1) competitive FMCG intensity could delay breaking even, (2) severe
monsoon failure could impact raw material availability and (3) upside risks from
better-than-expected performance in non-cigarette FMCG.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ITC Limited
Firing on all cylinders; Buy
„Strong quarter outperformance; reiterate Buy
ITC reported robust 25% yoy growth in Q1 profits, beating estimates by 4%. While
revenue grew 21% yoy, sharp volume growth in cigarettes and a consistent gain in
FMCG margins were the key highlights. Post Q1, we reiterate our Buy, with a PO of
Rs235. We also see upside risk from higher-than-expected growth in cigarettes.
Volumes and better mix drive outperformance in cigarettes
Revenue from cigarettes grew 16% yoy, which we believe was a result of i) 8% to
9% volume growth (vs. 7% estimated), ii) ~4.5% price increase and iii) better mix.
This drove the 21%yoy growth in segmental EBIT and a margin jump of 230bps
that was also led by benign pricing in tobacco. We expect robust performance in
cigarettes to continue through FY12 and see upside risk to estimates from this.
The rest of the segments also posted robust numbers
FMCG revenue grew 20%yoy, along with 254bps margin improvement. Margins
have continued to improve in this segment since Q1FY09. Also, while ITC is
investing in the ‘personal care’ segment, ‘snacks’ are likely close to breaking even.
Revenue from hotels grew 10%, along with a ~390bps margin jump, which we
believe was because of higher room rents and improving occupancies. EBIT from
both agribusiness and paper grew ~20% on the back of strong revenue growth.
Attractive valuations: lower monsoon risks, improving RoE
ITC trades at 22.5xFY13e PE for ~19% earnings CAGR. We believe this is
attractive, given (1) an improving earnings profile, as reflected by the 5% jump in
return ratios, (2) successful diversification and (3) lower monsoon-led risks vs.
peers. Our PO of INR235 is based on DCF and implies one-year fwd P/E of 24x.
Price objective basis & risk
ITC Limited (ITCTF)
We value ITC on Discounted Cash Flow basis and validate PO with Sum of the
Parts (SOTP) where we compare cigarettes business to international cigarettes
comparable peer and FMCG, Hotels and Paper business with Indian industry
peers. Our DCF based PO of Rs235 is in line with SOTP. PO implies a 1yr fwd
multiple of 24x at a higher end of historical trading range for ITC. We believe this
is justified given improving return ratios, sustained dividend payout and
successful diversification.
Risks: (1) competitive FMCG intensity could delay breaking even, (2) severe
monsoon failure could impact raw material availability and (3) upside risks from
better-than-expected performance in non-cigarette FMCG.
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