ITC (Q3 FY12)

CMP Rs201, Target Rs232, Upside 15.4%

• Revenues register ~14% yoy growth at Rs62bn, driven by strong growth in cigarettes and Other-FMCG segment. Slower growth in agri and hotels segment restricted further revenue growth
• Operating margins witnessed 130bps expansion at 37.6% aided by a 210bps drop in raw material cost. Cigarette margins expanded sharply by 250bps to 31.7%
• Losses in the Other-FMCG segment reduced to Rs466mn against Rs736mn in Q3 FY11. Net profit for the quarter matched our expectations by recording strong 22.5% yoy growth at Rs17bn
• 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

Result table

(Rs m)	Q3 FY12	Q3 FY11	% yoy	Q2 FY12	% qoq
Net sales	61,954	54,243	14.2	59,742	3.7
Material costs	(18,544)	(17,079)	8.6	(18,162)	2.1
Purchase of traded gds	(3,181)	(3,056)	4.1	(5,029)	(36.8)
Personnel costs	(2,981)	(2,773)	7.5	(2,650)	12.5
Other overheads	(13,962)	(11,642)	19.9	(12,821)	8.9
Operating profit	23,287	19,693	18.3	21,080	10.5
OPM (%)	37.6	36.3	128 bps	35.3	230 bps
Depreciation	(1,739)	(1,681)	3.4	(1,701)	2.2
Interest	(157)	(111)	41.4	(142)	10.5
Other income	3,375	2,412	40.0	2,918	15.7
PBT	24,767	20,313	21.9	22,155	11.8
Tax	(7,757)	(6,422)	20.8	(7,012)	10.6
Effective tax rate (%)	(31.3)	(31.6)	-	(31.6)	-
Reported PAT	17,010	13,891	22.5	15,143	12.3
PAT margin (%)	27.5	25.6	185 bps	25.3	211 bps
Ann. EPS (Rs)	8.7	7.2	21.0	7.8	12.0

Source: Company, India Infoline Research

Segment-wise net sales and EBIT break-up

Segments	Q3 FY12
(Rs mn)	Revenues	yoy (%)	EBIT	yoy (%)
Cigarettes	32,328	16.6	18,442	20.3
FMCG - Others	13,707	24.4	(466)	(36.6)
Hotels	2,787	(1.0)	1,017	14.8
Agri Business	11,394	9.8	1,417	9.7
Paper & Packaging	9,784	11.5	2,243	17.2
Total	70,001	15.3	22,653	21.2
Inter-segment revenue	(8,047)	24.4	-	-
Net sales	61,954	14.2	-	-

Source: Company, India Infoline Research

Hotels and agri business restrict revenue growth
ITC reported 14.2% yoy increase in revenues at ~Rs62bn during Q3 driven by 16.6% yoy growth in core cigarettes segment. Cigarettes volume growth remained strong at ~4-5% (marginally below expectations). Revenue growth could have been even better but for slower growth in agri and hotels (1% yoy decline) segments. Strong growth in foods and personal care business fuelled Other-FMCG revenues by 24.4% yoy to Rs13.7bn.The Noodles segment of ITC is doing extremely well and has successfully gained a national market share of high single digits. Healthy 11.5% yoy increase in Paper and packaging segment further fuelled revenue growth.

Lower raw material cost fuel OPM, cigarette EBIT margins expand by 250bps
Operating margins expanded by 130bps to 37.6% fuelled by a 210bps drop in raw material cost. Cigarette EBIT margin witnessed a sharp 250bps expansion at 31.7%, which was a positive surprise. Price hikes coupled with premiumisation of its portfolio have helped ITC improve cigarette EBIT margins. ITC has managed to reduce losses in the Other-FMCG segment to Rs466mn (Rs736mn in Q3 FY11) as profits from the foods segment are increasing sequentially. The management expects this segment to break even at EBIT level by FY13.

Cost analysis

As a % of net sales	Q3 FY12	Q3 FY11	bps yoy	Q2 FY12	bps qoq
Material costs	29.9	31.5	(155)	30.4	(47)
Purchase of traded goods	5.1	5.6	(50)	8.4	(328)
Personnel costs	4.8	5.1	(30)	4.4	38
Other overheads	22.5	21.5	107	21.5	108
Total costs	62.4	63.7	(128)	64.7	(230)

Source: Company, India Infoline Research

Segment wise EBIT margin (%)

Segments (as a % of sales)	Q3 FY12	Q3 FY11	bps yoy	Q2 FY12	bps qoq
Cigarettes	31.7	29.3	247	31.5	23
FMCG - Others	(3.4)	(6.7)	327	(4.2)	76
Hotels	32.7	29.2	349	18.5	1,416
Agri Business	12.4	12.5	(2)	16.6	(421)
Paper & Packaging	21.8	20.9	89	27.5	(568)

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 22.5% yoy growth at Rs17bn during the quarter. A sharp improvement in profitability of cigarettes segment and reducing losses in the FMCG-others segment were the key growth drivers. The growth was partly driven by higher other income of Rs3.4bn against Rs2.4bn in Q3 FY11 largely on account of higher yield on cash and dividend income.

Margins to expand; earnings to witness 17.8% CAGR over FY11-13E
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 17.8% CAGR in net profit over FY11-13. At the current market price of Rs201, the stock is trading at 22.5x FY13E EPS of Rs8.9.We maintain BUY with a 9-mth price target of Rs232.

Financial Summary

Y/e 31 Mar (Rs m)	FY11	FY12E	FY13E	FY14E
Revenues	211,676	248,605	287,533	331,060
yoy growth (%)	16.6	17.4	15.7	15.1
Operating profit	71,534	85,558	100,277	116,301
OPM (%)	33.8	34.4	34.9	35.1
Pre-exceptional PAT	49,876	59,308	69,179	79,881
Reported PAT	49,876	59,308	69,179	79,881
yoy growth (%)	22.8	18.9	16.6	15.5
EPS (Rs)	6.4	7.7	8.9	10.3
P/E (x)	31.2	26.3	22.5	19.5
Price/Book (x)	9.8	9.1	8.4	7.8
EV/EBITDA (x)	21.5	17.9	15.2	13.0
Debt/Equity (x)	0.0	0.0	0.0	0.0
RoE (%)	33.2	35.8	38.8	41.6
RoCE (%)	46.0	49.7	54.0	58.1

Source: Company, India Infoline Research