Recommendations » India

ITC Q3FY13 results update

Contributed by Nirmal Bang

ITC 's third quarter net profit rose better than consensus estimates and it was up by 20.6% YoY to Rs 2051.9 crores, helped especially by strong growth in its Other FMCG and Agri business. ITC continues to see robust growth in its core cigarettes and other FMCG business, which includes processed foods and personal care products. The Cigarette margin improved YoY by 410bps and decline marginally by 30bps on QoQ basis driven by the price hike, better product mix (launch in the >65mm filter category has seen good initial response and management plans a nationwide launch which could also provide long term volume growth opportunity). ITC has taken Ĕ16% price hike YoY which has been driving revenue growth for the company and also the new addition of cigarette consumers every year will keep the demand of cigarettes un-deterred. Any further price hike during Q4 could add to earnings upside. The cigarette industry is facing a concern over the extent of excise duty hike during FY14 Union Budget. We are of the view, as the demand for cigarette is resilient and ITC enjoys the pricing power and being a market leader can do away with moderate increase in excise duty by not impacting the demand meaningfully.

- Standalone Net Sales for Q3FY13 went up by 23.1% YoY to Rs. 7627.1 crores and up by 6.7% QoQ. The company posted remarkable revenue growth primarily driven by 43.1% YoY growth in Agri business, 30.1% YoY growth in Other FMCG business and 13.1% YoY growth in Cigarette business.

- EBITDA increased by 19.8% YoY to Rs. 2857.8 crores in Q3FY13 and by 6.3% QoQ. The cigarette segment reported a strong EBIT growth of 21.1% YoY. EBIT margins for the cigarette increased by 410bps YoY to 61.1%, driven largely by price increase taken during the quarter and product mix improvement. Other FMCG revenues grew by 30.1% YoY even as segment losses reduced by 48.6% YoY. Paperboard reported a decline in EBIT margin by 140bps YoY to 21.5% due to steep rise in input price particularly wood. Agri business reported a decline in EBIT margin by 180bps YoY to 10.6%. Hotel continues to report subdued performance where the EBIT margin is declined by 1860bps YoY due to weak economic conditions. The Company reported an EBITDA margin of 37.5% in Q3FY13, as compared to 38.5% in Q3FY12 and 37.6% in Q2FY13.

Valuation & Recommendation

We forecast ITC¡¦s sales to rise at a CAGR of 16.3% for FY12-14, with most segments recording relatively steady growth over the next two years. We are positive on ITC due to its strong pricing power, improving return ratios, strong free cash flows and strong earnings growth visibility which is likely to support valuations. Due to concern related excise duty hike in FY14 Union Budget, can keep the share price under check, which should be used as a buying opportunity; in our view. At CMP of Rs. 287 per share, the stock is trading at a PE of 30.9x FY13E & 26.3x FY14E. We maintain ¡§HOLD¡¨ rating and our target price of Rs. 317 based on SOTP (FY14E).