ITC (Q1 FY12)

CMP Rs206, Target Rs232, Upside 12.8%

• Q4 revenues register ~20% yoy growth at Rs57.7bn - above our expectations, driven by strong growth in cigarettes and agri segment
• Operating margin for the quarter declined by 70bps to 32.7% due to higher raw material cost. EBIT margin in the cigarettes segment expanded by 200bps to ~30%.  
• Net profit for the quarter matched our expectations by recording a strong 24.5% yoy growth at Rs13.3bn
• We expect the company to witness a 16.5% CAGR in revenues and 17.8% in net profit over FY11-13. Maintain BUY with a revised 9-mth price target of Rs232

Result table

(Rs m)	Q1 FY12	Q1 FY11	% yoy	Q4 FY11	% qoq
Net sales	57,675	48,236	19.6	58,363	(1.2)
Material costs	(18,638)	(14,659)	27.1	(19,775)	(5.7)
Purchase of traded goods	(4,354)	(3,270)	33.1	(4,801)	(9.3)
Personnel costs	(3,942)	(3,419)	15.3	(2,790)	41.3
Other overheads	(11,906)	(10,817)	10.1	(13,106)	(9.2)
Operating profit	18,834	16,070	17.2	17,891	5.3
OPM (%)	32.7	33.3	(66) bps	30.7	200 bps
Depreciation	(1,665)	(1,597)	4.2	(1,642)	1.4
Interest	(165)	(124)	32.6	(140)	17.4
Other income	2,366	1,351	75.0	2,259	4.7
PBT	19,370	15,701	23.4	18,368	5.5
Tax	(6,043)	(4,998)	20.9	(5,553)	8.8
Effective tax rate (%)	(31.2)	(31.8)	-	(30.2)	-
Reported PAT	13,327	10,703	24.5	12,815	4.0
Adj. PAT margin (%)	23.1	22.2	92 bps	22.0	115 bps
Ann. EPS (Rs)	6.9	11.2	(38.6)	6.6	4.0

Source: Company, India Infoline Research

Segment-wise net sales and EBIT break-up

Segments	Q1 FY12
(Rs mn)	Revenues	yoy (%)	EBIT	yoy (%)
Cigarettes	28,736	15.7	15,767	20.8
FMCG – Others	11,978	19.6	(763)	(14.5)
Hotels	2,305	9.8	513	33.2
Agri Business	17,071	25.8	1,571	21.1
Paper & Packaging	9,596	20.9	2,270	20.4
Total	69,685	19.2	19,358	23.1
Inter-segment revenue	(12,010)	17.5	-	-
Net sales	57,675	19.6	-	-

Source: Company, India Infoline Research

Q1 revenue growth above expectations
ITC reported 19.6% yoy increase in revenues at Rs57.7bn (our expectation Rs56.1bn) during Q1 FY12 driven by 12.9% yoy growth in core cigarettes segment. Strong 25.8% yoy increase in agri revenues (driven by higher trading volumes and improved realisations in soya, wheat and coffee) at Rs17bn further fuelled revenue growth. Strong 21% yoy growth in branded packaged foods business fuelled Other-FMCG revenues by 19.4% yoy to Rs12bn. Paper and packaging segment registered 22% yoy growth while revenues from hotels segment grew by 12.2% yoy.

OPM declined by 70bps at 32.7%, cigarette EBIT margin expands by 200bps
Operating margin for the quarter declined by 70bps to 32.7% due to sharp 270bps increase in raw material cost. EBIT margin in the cigarettes segment witnessed strong 200bps expansion at 29.9% aided by the price hikes. Hotels segment registered 320bps increase in margin (on a low base) at 20.3%. EBIT margin in the agri segment declined marginally by 40bps to 9.2%. ITC has managed to reduce losses in the FMCG-others segment to Rs763mn (Rs893mn in Q1 FY11) as profits from the foods segment are increasing sequentially.

Cost analysis

As a % of net sales	Q1 FY12	Q1 FY11	bps yoy	Q4 FY11	bps qoq
Material costs	32.3	30.4	193	33.9	(157)
Purchase of traded goods	7.5	6.8	77	8.2	(68)
Personnel costs	6.8	7.1	(25)	4.8	206
Other overheads	20.6	22.4	(178)	22.5	(181)
Total costs	67.3	66.7	66	69.3	(200)

  Source: Company, India Infoline Research

Segment wise EBIT margin (%)

Segments (as a % of sales)	Q1 FY12	Q1 FY11	bps yoy	Q4 FY11	bps qoq
Cigarettes	29.9	27.9	197	28.8	115
FMCG - Others	(6.4)	(8.9)	252	(5.2)	(119)
Hotels	20.3	17.1	321	30.7	(1,038)
Agri Business	9.2	9.6	(36)	9.2	(2)
Paper & Packaging	22.4	22.7	(29)	20.1	229

  Source: Company, India Infoline Research
Healthy revenue growth coupled with higher other income drives net profit
Net profit matched our expectations by recording a strong 24.5% yoy growth at Rs13.3bn during the quarter. A sharp improvement in profitability of cigarettes and agri segment and reducing losses in the FMCG-others segment were the key growth drivers. The growth was partly driven by higher other income of Rs2.4bn against Rs1.4bn in Q1 FY11.

Maintain Buy
We remain positive on ITC given the strong resilience in its core cigarette business. With its strong pricing power and brand portfolio, ITC continues to dominate the Indian cigarette industry with ~73% value market share. We expect ITC to report strong volume growth in FY12 on a low base. The profitability in the foods business has improved driven by higher margins in biscuits and staples segment, which has been a key factor in reducing losses in the other FMCG segment (expected to break-even at EBIT level in FY13). Hotels segment profitability continues to improve further. We expect ITC to register 17.8% CAGR in net profit over FY11-13. At the current market price of Rs206, the stock is trading at 23x FY13E EPS of Rs8.9. We maintain BUY with a revised 9-mth price target of Rs232 (earlier Rs216).

Financial Summary

Y/e 31 Mar (Rs m)	FY10A	FY11	FY12E	FY13E
Revenues	181,532	211,676	248,605	287,533
yoy growth (%)	16.3	16.6	17.4	15.7
Operating profit	60,740	71,534	85,558	100,277
OPM (%)	33.5	33.8	34.4	34.9
Pre-exceptional PAT	40,610	49,876	59,308	69,179
Reported PAT	40,610	49,876	59,308	69,179
yoy growth (%)	24.4	22.8	18.9	16.6
EPS (Rs)	5.3	6.4	7.7	8.9
P/E (x)	38.7	32.0	26.9	23.0
Price/Book (x)	11.2	10.0	9.3	8.6
EV/EBITDA (x)	25.7	22.0	18.3	15.6
Debt/Equity (x)	0.0	0.0	0.0	0.0
RoE (%)	29.2	33.2	35.8	38.8
RoCE (%)	40.9	46.0	49.7	54.0

Source: Company, India Infoline Research