ITC Ltd (Q3 CY12) – BUY

India Infoline News Service | Mumbai |

Cigarette margins expanded by 90bps to 32.4%. Losses in the Other-FMCG segment reduced to Rs303mn

CMP Rs298, Target Rs327, Upside 10.1%
  • Results above expectations. Revenues grew by ~20% yoy to Rs71.5bn, driven by healthy growth in cigarettes, Other-FMCG and agri segment.
  • Cigarette margins expanded by 90bps to 32.4%. Losses in the Other-FMCG segment reduced to Rs303mn
  • OPM witnessed 130bps expansion at 36.5% aided by sharp 710bps drop in raw material cost. Net profit for the quarter surpassed our expectations by recording ~21% yoy growth at Rs18.4bn
  • We expect ITC to witness a revenue/PAT CAGR of 16.2%/18.4% respectively over FY12-14. Maintain BUY with a revised 9-mth price target of Rs327
Result table (Standalone)
(Rs m) Q2 FY13 Q2 FY12 % yoy Q1 FY13 % qoq
Net sales 71,460 59,742 19.6 66,522 7.4
Material costs (28,644) (23,297) 23.0 (25,766) 11.2
Personnel costs (2,892) (2,560) 13.0 (4,125) (29.9)
Other overheads (13,847) (12,832) 7.9 (13,557) 2.1
Operating profit 26,077 21,053 23.9 23,075 13.0
OPM (%) 36.5 35.2 125 bps 34.7 180 bps
Depreciation (1,889) (1,701) 11.0 (1,948) (3.0)
Interest (233) (207) 12.3 (138) 69.3
Other income 2,656 3,011 (11.8) 2,376 11.8
PBT 26,611 22,155 20.1 23,366 13.9
Tax (8,247) (7,012) 17.6 (7,344) 12.3
Effective tax rate (%) (31.0) (31.6) - (31.4) -
Reported PAT 18,364 15,143 21.3 16,021 14.6
PAT margin (%) 25.7 25.3 35 bps 24.1 161 bps
Ann. EPS (Rs) 9.4 7.8 20.0 8.2 14.6
Source: Company, India Infoline Research

Segment-wise net sales and EBIT break-up
Segments Q2 FY13
(Rs mn) Revenues yoy (%) EBIT yoy (%)
Cigarettes 33,852 14.0 20,802 20.3
FMCG - Others 16,908 26.1 (303) (45.8)
Hotels 2,170 2.8 153 (64.8)
Agri Business 20,239 41.1 2,597 8.8
Paper & Packaging 10,590 5.3 2,825 (2.5)
Total 83,758 20.3 26,074 16.1
Inter-segment revenue (12,298) 24.8 - -
Net sales 71,460 19.6 - -
Source: Company, India Infoline Research

Cigarette and agri segment fuel revenue growth

ITC reported 19.6% yoy increase in revenues at Rs71.5bn (above our expectations of Rs68.7bn) during Q2 FY13 driven by 14% yoy growth in core cigarettes segment. Cigarette volumes remained flat despite steep price hikes over the past two quarters. A 41% yoy jump in agri (driven by wheat exports) and 26% yoy increase in Other-FMCG revenues (led by strong growth in foods and personal care business) further fuelled revenue growth. The growth could have been even better but for slower growth in hotels (due to weak economic environment) and paper segment revenues.


Drop in overhead cost fuels OPM, cigarette EBIT margins expand by 90bps

OPM expanded by 130bps to 36.5% fuelled by a 210bps decline in overhead cost. A sharp rise in outsourcing cost (15.4% of net sales Vs 7.3% in Q2 FY12) restricted further margin expansion. Cigarette EBIT margins witnessed 90bps expansion at 32.4%. Price hikes (~20% in Q1 FY13) 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 Rs303mn (Rs559mn in Q2 FY12) as profits from the foods segment are increasing sequentially. The management expects this segment to break even by FY13.


Cost analysis
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As a % of net sales Q2 FY13 Q2 FY12 bps yoy Q1 FY13 bps qoq
Material costs 40.1 39.0 109 38.7 135
Personnel costs 4.0 4.3 (24) 6.2 (215)
Other overheads 19.4 21.5 (210) 20.4