ITC Beats estimates, yet again! ::Macquarie Research,

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ITC
Beats estimates, yet again!
Event
 ITC reported strong 1Q results much ahead of our and street estimates. Net
sales and PAT grew 21% and 25% to Rs58.6bn and Rs13.3bn respectively.
Key highlights were >8% cigarette volume growth and margin expansion
across most of the businesses. FMCG business losses also declined 15%
YoY as margin expanded 254bp. Reiterate Outperform recommendation with
a target price of Rs225/share.
Impact
 Another quarter of strong sales and profit growth. While net sales grew
21% YoY (Rs58.6bn), net profit grew 25% YoY to Rs13.3bn in 1QFY12. The
company’s EBITDA margin remained flat at 33.7% in 1QFY12. We believe
pricing power in the cigarette business coupled with a sourcing advantage
provides resilience to ITC’s margins.
 Stellar performance in cigarette business. ITC’s cigarette net sales
(Rs28.7bn) increased 16% YoY, led by 8-9% volume growth and a 4-5%
increase in pricing. Cigarette EBIT increased 21% YoY with EBIT margin
expansion of 233bp, 11th quarter of margin expansion in the last 13 quarters.
Strong cigarette volume growth returned after a 2.8% volume decline in FY11.
 FMCG business – marching towards breakeven. ITC is seeing strong
growth in its foods and personal care portfolio with sales growth of 20% YoY
in 1Q. EBIT losses (Rs763m) declined 15% YoY in 1Q with 197bp expansion
in margins. Branded packaged food sales grew 21% in 1QFY12 and the
personal care portfolio is also performing well.
 Contribution from other businesses also improved significantly. The agri
business reported 26% YoY sales growth, Paperboard and Packaging 21%
and hotel business 10% in 1Q. Hotel margin expanded 391bp, agri business
and paper and packaging businesses margins were flat. Given strong growth
in non-cigarette businesses, the contribution of the cigarette business to
overall sales and EBIT declined by ~190bp.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs225.00 based on a Sum of Parts methodology.
 Catalyst: Strong volume growth in cigarette business
Action and recommendation
 Outperform maintained. ITC is our preferred pick amongst large-cap FMCG
companies, given its robust core cigarette business along with expanding food
and personal care portfolio.
 ITC is trading at a 12% discount to Hindustan Unilever (HUVR IN, Rs322.70, UP,
TP:Rs265) despite superior earnings growth, which we think is unwarranted.