ITC - Rounds off a strong FY13; remains a core LT holding ::JPMorgan

ITC rounded off FY13 with another good quarterly performance, with revenue
and earnings for Q4FY13 coming in ahead of our estimates. Net sales, EBITDA,
and PAT witnessed growth of 19%, 20% and 19%, respectively. Cigarette, other
FMCG and agri business in particular posted healthy EBIT growth. We believe
ITC should remain a core long-term holding, given steady cigarette EBIT growth
(supported by strong pricing power), improving profitability of other FMCG
business, high FCF generation, and potential for a higher dividend payout.
Aggressive price hikes this fiscal year will overshadow volume weakness and
support mid- to high teens earnings growth in our view. The stock has run up 17%
YTD (trading close to the higher end of its historical valuation band, relative
returns of 13% vs. the Sensex) and we would seek better entry points.

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 Cigarette demand fairly resilient; healthy EBIT growth sustains. ITC
reported 18% cigarette sales growth led mostly by pricing and estimated ~3%
volume growth. Pricing benefits, improved mix (Kings segment growing faster)
and operating leverage aided margin expansion of 60bp y/y for cigarettes
(though a tad lower than our estimates) leading to 20% EBIT growth. Better
offtake for 64mm cigarettes (where excise was kept unchanged in FY14) has
seen good consumer response and this could help offset some volume weakness
in FY14E. We believe pricing will continue to support healthy 17% cigarette
EBIT CAGR over FY13-15E.
 Other FMCG posted strong performance with sales growth of 26% y/y. The
division posted positive EBIT for the first time at Rs119mn (0.6% of sales).
Revenue growth was driven by strong volume growth (estimated mid teens) and
product mix improvement across various categories of foods, personal care and
stationery. We expect profitability to improve further in FY14 led by scale
benefits, mix enhancement, and product innovation.
 Non-FMCG: expect better performance in FY14. Hotels division continued
to witness weak growth given challenging macro, higher inventory levels in the
industry and operating costs related to the recent launch of ITC Grand Chola at
Chennai. Paper division suffered from high input costs (wood, coal) leading to
subdued EBIT. However, agri business registered healthy 21% EBIT growth
led by strong export sales for wheat and soya. We expect hotel and paper
divisions to fare better in FY14. Hotel division will likely benefit from marginal
recovery in demand and higher utilization of new hotel in Chennai in our view.
Paper division has seen 20% additional capacity in Q4 and that should aid
revenue growth in FY14. Margins for paper division are expected to remain
stable @ ~21%. We expect agri business to register mid-teens revenue and EBIT
growth over FY14/15E.