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ITC Ltd Q4FY14 results update

May 28, 2014, Wednesday, 08:08 GMT | 03:08 EST | 11:38 IST | 14:08 SGT
Contributed by Nirmal Bang

- ITC posted a good quarter in terms of Net Sales/Gross Profit/EBITDA/PAT increased by 11.8%/13.9%/18.4%/18.2% YoY respectively. Further, Gross margin improved by 110bps YoY to 57.7% and down by 240bps QoQ.

- Improvement in Cigarette EBIT margin by 430bps YoY; however volume declined by ~3% in Q4FY14 (the decline was ~2% in Q3FY14).

- In the last three months, ITC has underperformed Sensex by 11.7% since its Q3FY14 result. This underperformance is driven by expensive valuation, slowdown in cigarette volume, shift towards high beta sectors. However, we believe valuations have corrected after this underperformance and currently trade at attractive valuations. We feel the discount is not justified as ITC provides strong earnings visibility on account of pricing power in cigarette business, expected reversal in decline in cigarette volume and break-even in foods/personal products. We have introduced FY16E numbers. We expect net sales to grow by 19.5% in FY15E and by 16.6% in FY16E. At CMP, ITC is trading at a PE of 25.3x FY15E & 21.8x FY16E. The success of 64mm cigarette, turnaround in Other FMCG business to improve overall RoE and strong pricing power, should be key decisive factor for the stock going forward. We have revised our TP of Rs 429 based on SOTP (FY16E) with a BUY rating.

The cigarette net revenue growth was up by 12.6% YoY to Rs. 4078.8cr. However, business grew its profitability by 20.8% YoY primarily led by premiumization and better revenue mix which was off-set by ?3% volume decline. Despite heavy taxation inflicted on cigarettes last year, ITC continue to maintain its average +18% EBIT growth mainly driven by the increased share of 64mm cigarettes and decline in RSFT (regular size filter tip) cigarettes during FY14. We feel that, with good growth in 64mm cigarettes which contributes 7%-8% to the total cigarette revenue and Kings segment, the volume decline would be curtailed. More importantly, 64mm segment is not diluting the margins. We expect volume to recover in FY15E on the account of a) sustained growth in the 64mm cigarette segment while volume decline in other segment is slowing, b) the growth in 64mm segment is attributed to the shift from bidis/illicit cigarette and less from cannibalization, c) effective ban on the Gutkha is likely to support volume growth. Thus benefitting ITC; in our view.

ITC's non-cigarette FMCG revenue grew by 13.7% YoY. However, to our surprise, the business posted profit of Rs 43.1cr in Q4FY14 as against Rs 11.9cr in Q4FY13, jump by ?4x YoY. Despite quarterly fluctuation in the Other FMCG business and broad-based slowdown in the staples category, ITC had achieved break-even in FY14. The segment had posted a profit of Rs 21.8cr in FY14 as compared to loss of Rs 81.3cr in FY13. Further, Agri business reported a revenue growth of 8.1% YoY to Rs 2004.2cr in Q4FY14 primarily due to improved realization and higher volumes. Paperboard reported a revenue increase by 19.3% YoY to Rs 1261.2cr in Q4FY14 aided by higher volumes and product mix enrichment.