ITC (Q4 FY12)

CMP Rs232, Target Rs268, Upside 15.6%

• Revenues beat expectations, up by ~18% yoy at Rs68.6bn, driven by strong growth in cigarettes, Other-FMCG and agri segments. Cigarette margins expanded by 210bps to 30.9% on a low base
  

• Losses in the Other-FMCG segment reduced to Rs167mn against Rs678mn in Q4 FY11
  

• OPM witnessed 90bps expansion at 31.6% aided by a 140bps drop in raw material cost. Net profit for the quarter matched our expectations by recording strong 26% yoy growth at Rs16bn
  

• We expect ITC to witness a 14.5% CAGR in revenues and 17% in net profit over FY12-14. Maintain BUY with a 9-mth price target of Rs268

Cigarettes, Other-FMCG & agri business fuel revenue growth

ITC reported 17.6% yoy increase in revenues at ~Rs68.6bn during Q4 FY12 driven by 17.4% yoy growth in core cigarettes segment – ahead of our expectations of Rs66.6bn. A sharp 30.7% yoy increase in agri and 23.2% yoy in Other-FMCG (led by strong growth in foods and personal care business) revenues further fuelled revenue growth. The revenue growth could have been even better but for slower growth in Paper and packaging and decline in hotels segment revenues.

Lower raw material cost fuel OPM, cigarette EBIT margins expand by 210bps

Operating margins expanded by 90bps to 31.6% fuelled by a 140bps drop in raw material cost. Higher staff and overhead cost restricted further margin expansion. Cigarette EBIT margins witnessed a sharp 210bps expansion at 30.9%, though on a low base. Price hikes coupled with premiumisation of its portfolio have helped ITC improving cigarette EBIT margins. ITC has managed to reduce losses in the Other-FMCG segment to Rs167mn (Rs678mn in Q4 FY11) as profits from the foods segment are increasing sequentially. The management expects this segment to breakeven 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 26% yoy growth at Rs16.1bn 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 Rs3bn against Rs2.3bn in Q4 FY11 largely on account of higher yield on cash and dividend income.

Margins to expand; earnings to witness 17% CAGR over FY12-14E

ITC remains one of our top picks in the sector given the strong resilience in its core cigarette business. We believe the removal of the ad valorem excise duty on cigarettes will help ITC maintain its pricing power and expand margins on a consistent basis. ITC is gaining traction in non-cigarette businesses as well making it a well diversified growth company. We expect ITC to witness 14.5% and 17% CAGR in revenues and net profit respectively over FY12-14. At the current market price of Rs232, the stock is trading at 21.5x FY14E EPS of Rs10.8. We maintain Buy with a 9-mth price target of Rs268.