ITC (Q2 FY12)

CMP Rs207, Target Rs232, Upside 12.3%

• Q2 FY12 results in line with expectations. Revenues register ~18% yoy growth at Rs59.7bn, driven by strong growth in cigarettes and Other-FMCG segment
  
• Operating margin stable at ~35% despite sharp 220bps increase in raw material cost. EBIT margin in the cigarettes segment expanded by 120bps to ~32% 
  
• Net profit for the quarter recorded a strong ~21% yoy growth at Rs15.1bn
  
• 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 9-mth price target of Rs232

Q2 revenues in-line with expectations

ITC reported 17.5% yoy increase in revenues at Rs59.7bn during Q2 FY12 driven by 16.4% yoy growth in core cigarettes segment. Cigarettes volume growth remained strong at 7.5% despite ~6% price hikes implemented during the quarter. Over 20% yoy growth in foods and personal care business fuelled Other-FMCG revenues by 27% yoy to Rs13.4bn. Healthy 12.8% yoy increase in agri revenues (driven by higher trading volumes and improved realisations in soya, wheat and coffee) at Rs14.3bn further fuelled revenue growth. Paper and packaging segment registered 9.4% yoy growth while revenues from hotels segment grew by 1.1% yoy.

OPM stable at 35.3%, cigarette EBIT margin expands by 120bps

ITC was able to maintain its operating margins by 10bps to 35.3% despite sharp 220bps increase in raw material cost. Cigarette EBIT margin witnessed a sharp 120bps expansion at 31.5% as the price hikes taken were much higher than the ~3% required to pass on the increase in state VAT impact. ITC has managed to reduce losses in the FMCG-others segment to Rs559mn (Rs669mn in Q2 FY11) as profits from the foods segment are increasing sequentially. The management expects this segment to achieve break-even at EBIT level by FY13.

Healthy revenue growth coupled with higher other income drives net profit

Net profit matched our expectations by recording a strong 21.5% yoy growth at Rs15.1bn 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 Rs2.9bn against Rs2.2bn in Q2 FY11.

Margins to expand; earnings to witness ~18% CAGR

ITC remains one of our top picks in the sector given the strong resilience in its core cigarette business. With firm consumer demand and strong brand portfolio, we believe ITC is well-positioned to grow cigarette volumes at 6-8% in FY12 (on a weak base of FY11). The earnings growth outlook for ITC is improving, especially in the core cigarette segment coupled with improved profitability across all the non-cigarettes segments. We expect ITC to register ~18% CAGR in net profit over FY11-13. At the current market price of Rs207, the stock is trading at 23.2x FY13E EPS of Rs8.9. We maintain BUY with a 9-mth price target of Rs232.