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ITC Q3FY14 results update

January 20, 2014, Monday, 06:39 GMT | 02:39 EST | 12:09 IST | 14:39 SGT
Contributed by Nirmal Bang


- ITC register a Net revenue growth of 13.1% YoY to Rs. 8623.1cr and PAT grew by 16.3% YoY to Rs. 2385.3cr in Q3FY14.
 
- Improvement in Cigarette EBIT margin by 340bps YoY; however volume declined by ?2% in Q3FY14 (the decline was ?4% in Q2FY14), suggesting recovery in cigarette volumes buoyed by the uptick in 64mm segment.
 
- In the last six months, ITC has underperformed Sensex by 16% since its Q1FY14 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 corrently trades at attractive valuations. Further, on FY15E basis, Bloomberg consensus, ITC is trading at discount compared to other FMCG companies. 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 continuous traction in foods/personal products. At CMP of Rs. 328, ITC is trading at a PE of 29.7x FY14E & 24.9x FY15E. 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 revised our TP to Rs. 394 (Rs 370 earlier) based on SOTP (FY15E) with a BUY rating.
 
The cigarette net revenue growth was up by 12.5% YoY to Rs. 4116.1cr. However, business grew its profitability by 18.8% YoY primarily led by premiumization and better revenue mix which was off-set by ?2% volume decline. We believe mix was adversely impacted by increased share of 64mm cigarettes and decline in RSFT (regular size filter tip) cigarettes during Q3. We feel, with good growth in 64mm cigarettes which contributes 7%-8% to the total cigarette revenue and Kings segment, the volume decline was curtailed. More importantly, the 64mm segment is not diluting the cigarette margins.
 
ITC's non-cigarette FMCG revenue grew by 16.6% YoY. However, the business posted profit of Rs 10.4cr in Q3FY14 as against loss of Rs 24cr in Q3FY13. The performance ahs been moderated in the recent past owing to the broad-based slowdown in the staples category.We believe that the quarterly fluctuation in the Other FMCG business may occur but the company is well on track and poised to achieve full year break-even in FY14E. Further, Agri business reported a revenue growth of 9.5% YoY to Rs 1786.4cr in Q3FY14 primarily due to higher realization and superior mix. Paperboard reported a revenue increase by 18.5% YoY to Rs 1257.4cr in Q3FY14 however; EBIT margins declined 310bps YoY owing to cyclicality and steep input cost.
 
- Standalone Net Sales for Q3FY14 was up by 13.1% YoY to Rs. 8623.1cr and by 10.9% QoQ.
 
- EBITDA increased by 14.9% YoY to Rs. 3284.3cr in Q3FY14. EBITDA margin stood at 38.1% in Q3FY14, up by 60bps YoY.
 
- PAT was up by 16.3% YoY to Rs. 2385.3cr in Q3FY14. PAT margin stood at 27.7% in Q3FY14, up by 80bps YoY.

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