26 July 2013
1QFY14 Results Update | Sector:
Consumer
ITC
BSE SENSEX
19,805
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
S&P CNX
5,908
ITC IN
7,738.1
380/248
6/21/23
CMP: INR359
TP: INR385
Neutral
M.Cap. (INR b) / (USD b) 2,776/47.0
Financials & Valuation (INR Billion)
Y/E MAR
Net Sales
EBITDA
Adj PAT
Adj.EPS
(INR)
Gr. (%)
BV/Sh.(INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (X)
2013 2014E 2015E
296.1
106.3
74.2
9.5
64.2
26.2
37.8
47.8
37.8
13.7
337.5
124.9
86.0
11.0
15.9
28.9
39.9
51.9
32.6
12.4
387.9
143.0
100.2
12.8
16.6
31.9
42.2
54.3
28.0
11.2
Margin expansion in Cigarettes drove overall EBITDA outperformance
ITC’s 1QFY14 revenues grew 10.3% to INR74.1b (est.INR76.9b), EBITDA grew 17.5% to
INR27.9b (est.INR27.7b), and PAT grew 18.1% to INR18.9b (est.INR18.4b). ITC
continues to deliver on its high teens Cigarette EBIT and PAT growth. Higher than
expected EBITDA despite lower sales growth was owing to sharp 110bp margin
expansion in Cigarettes, driven by higher price, better mix and cost containment
(segmental costs declined 7%, as the base quarter had higher promotional spends to
drive 64mm foray). EBITDA margin expanded 230bp to 37.7% (est 36%). Higher than
estimated other income (up 20%) resulted in PAT being 3% ahead of our estimate.
Segment-wise performance
Cigarette volumes declined ~2% (v/s our estimate of 1.5% decline).
Other FMCG sales grew 18%, lower than the recent trend of mid-20s, but higher
than peers. Other FMCG reported a loss of INR189m at the EBIT level.
Agri business revenues grew 29%, but margins declined 100bp.
Hotels continued to suffer from weak macros and higher room inventory – 7.5%
revenue growth, 65% EBIT decline.
Paper segment revenue grew 9.6%; EBIT declined 5% due to higher input costs.
Risk-reward unfavorable at current valuations; downgrading to Neutral
ITC’s consistent high-teens earnings growth, despite lower than expected sales, once
again demonstrates the resilience of its business model. We are upgrading our
estimate 0.5-2%. While our conviction on ITC’s business model remains undiminished,
at current valuations (34x FY14E and 28.5x FY15E EPS), we believe risk-reward is
unfavorable and downgrade our rating to Neutral, with a revised target price of
INR385 (30x FY15E EPS). ITC’s predictable high-teens earnings CAGR is well reflected
in current valuations, in our view. Continued preference for quality defensives in a
weak and uncertain macro environment is the key risk.
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Investors are advised to refer through disclosures made at the end of the Research Report.