ITC: Dominance to continue…

India Infoline News Service | Mumbai |

ITC has taken aggressive price hikes over the past two years, in a staggered manner to mitigate the higher excise duty impact and has managed to restrict the cigarette volume decline to ~3-4% yoy.

CMP Rs347, Target Rs398, Upside 14.6%
 

ITC remains one of our top picks in the sector given the strong resilience in its core cigarette business. At current market price, the stock is trading at 23.6x FY16E EPS of Rs14.7, a discount to large caps like HUL and Nestle. The current valuations ignore positives such as ITC’s dominant position in the cigarettes business and the consistent strong performance of its other-FMCG business. We remain confident of ITC’s pricing power to pass on any tax or duty hike to consumers and deliver mid-teen EBIT growth in cigarettes business. Further, higher cigarette volumes driven by the launch of 64mm cigarettes, potential break-even in other-FMCG business and steady ~16% CAGR in earnings is likely to help sustain re-rating. We maintain Buy.

 
Strong resilience in cigarette business

Unaffected by heavy tax burden and regulatory restrictions, ITC’s cigarette business continues to display resilience with stable earnings growth and healthy margin expansion. Despite steep price hikes over the past two years, ITC has been able to restrict cigarette volume decline to ~3-4% yoy. We expect cigarette volumes to decline by ~2% yoy in FY14 and increase by ~3% yoy in FY15, as there is very low probability of another sharp duty hike in the forthcoming budget after two consecutive years of sharp excise increases. Even in case of any duty hike, we believe, ITC can mitigate the impact by taking price hikes as cigarette demand is highly inelastic to price. We expect the cigarettes business to witness 12.3% revenue CAGR over FY13-16E.

 
Other-FMCG segment likely to break-even in current fiscal

With improving profitability in the foods segment (65%+ of FMCG business) driven by higher margins in biscuits and staples segment, the other-FMCG segment is emerging stronger (~24% revenue CAGR over FY10-13). Personal care products are also gaining good traction in key categories. ITC is investing heavily in brand building and plans to enter new categories (dairy, juices, tea, chocolates etc), which will further drive growth. The other-FMCG division continues to record 15%+ revenue growth and is expected to break even at EBIT level in current fiscal (77% yoy decline in loss at Rs213mn in 9M FY14).


Financial summary
Y/e 31 Mar (Rs m)
FY13
FY14E
FY15E
FY16E
Revenues
2,96,056
3,28,030
3,81,053
4,32,598
yoy growth (%)
19.4
10.8
16.2
13.5
Operating profit
1,06,275
1,21,145
1,43,086
1,63,810
OPM (%)
35.9
36.9
37.6
37.9
Reported PAT
74,184
86,659
1,01,835
1,16,782
yoy growth (%)
74,184
86,659
1,01,835
1,16,782
EPS (Rs)
9.4
10.9
12.8
14.7
P/E (x)
37.0
31.8
27.0
23.6
Price/Book (x)
12.3
10.9
9.6
8.4
EV/EBITDA (x)
25.5
22.4
18.9
16.5
RoE (%)
36.1
36.5
37.9
38.1
RoCE (%)
49.7
49.6
52.1
52.7
Source: Company, India Infoline Research


BSE 264.75 0.85 (0.32%)
NSE 264.60 0.35 (0.13%)

***Note: This is a NSE Chart

 

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