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ITC's core cigarette business has returned to positive volume growth of about 8% after a 2.8%
decline in FY11. In 1QFY12, ITC recorded 20%-plus EBIT growth in all of its key businesses. We
raise our EPS estimates by 2.5%, and introduce FY14 EPS estimates at Rs10.95. We reiterate
Buy with an increased TP of Rs240.
Reasons to be cheerful, despite tax hikes for cigarette business
While the recent VAT hikes in states like Tamil Nadu put pressure on ITC on the margin, we
believe that growing awareness of the health hazards from non-cigarette forms of tobacco, plus
restrictions on packaging and increased taxation of products like gutkha, zarda and chewing
tobacco create a long term positive. Cigarettes constitute just 15% of India’s tobacco
consumption, so we see great potential for this to increase. We estimate ITC achieved volume
growth of 8% in 1QFY12. While we expect growth for the rest of the year to moderate, we expect
still expect full-year volume growth of 5-6%.
Non-cigarette cash generation and growth improving
In 1QFY12, ITC’s non-cigarette business recorded EBIT of Rs4.35bn, 22.5% of total, and a yoy
increase of 24%. The cigarette business recorded EBIT of Rs15.7bn, 81% of total, and growth of 20.8%
yoy in 1QFY12. While ITC's cash generation (net of tax and working capital) from operations has grown
from Rs27.2bn in FY08 to Rs52.6bn in FY11, annual capex has fallen from Rs22.42bn in FY08 to
Rs12.73bn in FY11. This has consequently improved ITC's free cash generation from Rs9.3bn in FY08
to Rs44.6bn in FY11. The paper and hotel businesses have begun to generate free cash post their own
capex phases. Not long ago, these two business were causes of concern to investors as they were
dipping into the cigarette business’s cash. In FY11, however, the paper business generated Rs10.5bn
of gross cash with capex of just Rs2.5bn, while the hotel business generated gross cash of Rs3.51bn
with capex of Rs3.22bn. Even looking at the last 5-7 years, these two business have generally
been generating free cash.
Maintain Buy with target price of Rs240
We have raised our EPS estimates by 2.5% for FY12 and FY13, and have introduced FY14 EPS
estimates. Visibility to ITC’s growth remains strong, in our view, and we have adjusted our DCFbased
target price to Rs240 as we adjust for our earnings upgrades.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ITC's core cigarette business has returned to positive volume growth of about 8% after a 2.8%
decline in FY11. In 1QFY12, ITC recorded 20%-plus EBIT growth in all of its key businesses. We
raise our EPS estimates by 2.5%, and introduce FY14 EPS estimates at Rs10.95. We reiterate
Buy with an increased TP of Rs240.
Reasons to be cheerful, despite tax hikes for cigarette business
While the recent VAT hikes in states like Tamil Nadu put pressure on ITC on the margin, we
believe that growing awareness of the health hazards from non-cigarette forms of tobacco, plus
restrictions on packaging and increased taxation of products like gutkha, zarda and chewing
tobacco create a long term positive. Cigarettes constitute just 15% of India’s tobacco
consumption, so we see great potential for this to increase. We estimate ITC achieved volume
growth of 8% in 1QFY12. While we expect growth for the rest of the year to moderate, we expect
still expect full-year volume growth of 5-6%.
Non-cigarette cash generation and growth improving
In 1QFY12, ITC’s non-cigarette business recorded EBIT of Rs4.35bn, 22.5% of total, and a yoy
increase of 24%. The cigarette business recorded EBIT of Rs15.7bn, 81% of total, and growth of 20.8%
yoy in 1QFY12. While ITC's cash generation (net of tax and working capital) from operations has grown
from Rs27.2bn in FY08 to Rs52.6bn in FY11, annual capex has fallen from Rs22.42bn in FY08 to
Rs12.73bn in FY11. This has consequently improved ITC's free cash generation from Rs9.3bn in FY08
to Rs44.6bn in FY11. The paper and hotel businesses have begun to generate free cash post their own
capex phases. Not long ago, these two business were causes of concern to investors as they were
dipping into the cigarette business’s cash. In FY11, however, the paper business generated Rs10.5bn
of gross cash with capex of just Rs2.5bn, while the hotel business generated gross cash of Rs3.51bn
with capex of Rs3.22bn. Even looking at the last 5-7 years, these two business have generally
been generating free cash.
Maintain Buy with target price of Rs240
We have raised our EPS estimates by 2.5% for FY12 and FY13, and have introduced FY14 EPS
estimates. Visibility to ITC’s growth remains strong, in our view, and we have adjusted our DCFbased
target price to Rs240 as we adjust for our earnings upgrades.
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