ITC (Q1 FY15)

Net profit for the quarter was marginally below our expectations (of Rs22.2) at Rs21.9bn – up by 15.6% yoy partly led by strong revenue growth and higher other income.

Jul 31, 2014 10:07 IST India Infoline News Service

CMP Rs357, Target Rs417, Upside 17.0% 

  • ITC surpassed our revenue and PAT estimates by recording strong ~25%/16% yoy growth at Rs91.6bn/21.9bn respectively during Q1 FY15

  • Cigarette revenues grew by ~19% yoy to Rs42bn while EBIT margins expanded by 140bps. Cigarette volumes declined by ~2% yoy

  • Agri segment revenues increased by ~51% yoy to ~Rs33bn driven by led by wheat, soya and coffee exports. Other-FMCG segment reported a slower ~11% yoy growth at Rs19.3bn

  • OPM contracted by 230bps to 35.8% due to sharp rise in outsourcing cost. An 180bps drop in overhead cost restricted further margin erosion

  • We expect ITC to witness a revenue/PAT CAGR of ~15%/16% respectively over FY14-16. Maintain BUY with a 9-mth revised price target of Rs417

Result table (Standalone)
(Rs m) Q1 FY15 Q1 FY14 % yoy Q4 FY14 % qoq
Net sales 91,644 73,385 24.9 91,451 0.2
Other operating income 839 722 16.2 934 (10.2)
Total income 92,483 74,107 24.8 92,385 0.1
Material costs (39,776) (28,690) 38.6 (38,696) 2.8
Personnel costs (5,087) (4,269) 19.2 (4,108) 23.8
Other overheads (14,845) (13,236) 12.2 (17,547) (15.4)
Operating profit 32,776 27,913 17.4 32,034 2.3
OPM (%) 35.8 38.0 (227) bps 35.0 74 bps
Depreciation (2,313) (2,153) 7.4 (2,378) (2.7)
Interest (152) (170) (10.6) (95) 59.0
Other income 2,346 2,032 15.4 2,667 (12.1)
PBT 32,657 27,622 18.2 32,227 1.3
Tax (10,793) (8,709) 23.9 (9,447) 14.2
Effective tax rate (%) (33.0) (31.5) - (29.3) -
Reported PAT 21,864 18,913 15.6 22,780 (4.0)
PAT margin (%) 23.9 25.8 (192) bps 24.9 (105) bps
Ann. EPS (Rs) 11.0 9.6 14.8 11.5 (4.3)
Source: Company, India Infoline Research

Segment-wise net sales and EBIT break-up – Q1 FY15
Segments Q1 FY15
(Rs mn) Revenues yoy (%) EBIT yoy (%)
Cigarettes 42,011 18.8 27,218 21.4
FMCG - Others 19,346 10.9 (156) (17.6)
Hotels 2,487 (0.5) (121) -
Agri Business 32,961 50.6 2,025 1.6
Paper & Packaging 12,885 10.8 2,749 9.3
Total 1,09,689 23.5 31,714 18.2
Inter-segment revenue (18,045) 16.8 - -
Net sales 91,644 24.9 - -
Source: Company, India Infoline Research

Cigarette and agri segment drives revenue growth

ITC recorded robust ~25% yoy revenue growth at Rs91.6bn during Q1 FY15 – way above our expectations of Rs83.1bn, driven by strong growth in cigarette and agri business. Despite steep price hikes, ITC managed to restrict cigarette volume decline at ~2% yoy (our expectation of ~1-2%).

Cigarette segment registered strong 18.8% yoy revenue growth at Rs42bn. Agri segment recorded robust 50.6% yoy increase at ~Rs33bn driven by wheat, soya and coffee exports. A slower ~11% yoy growth Other-FMCG segment restricted further topline growth. Paper & packaging segment recorded 10.8% yoy growth at Rs12.9bn driven by higher capacity utilization of recent investments. Impacted by economic slowdown, hotels segment registered a decline in revenues.


Sharp rise in outsourcing cost pull down operating margins by 230bps to 35.8%

OPM contracted by 230bps to 35.8% due to sharp 920bps rise in outsourcing cost (included in raw material cost). ~180bps/30bps decline in overhead and staff cost respectively restricted further margin erosion. Cigarette EBIT for the quarter grew by 21.4% yoy to 27.2bn while EBIT margins expanded by 140bps to 64.8%. Other-FMCG segment posted a loss of Rs156mn at EBIT level against Rs189mn in Q1 FY14 due to sluggish demand conditions. Impacted by economic slowdown, Hotels segment registered a loss of Rs121mn against a profit of Rs89mn in Q1 FY14. Agri segment registered a flat profit growth while Paperboards division reported ~9% yoy increase in profit at Rs2.7bn.


Cost analysis
As a % of net sales Q1 FY15 Q1 FY14 bps yoy Q4 FY14 bps qoq
Material costs 43.4 39.1 431 42.3 109
Personnel costs 5.6 5.8 (27) 4.5 106
Other overheads 16.2 18.0 (184) 19.2 (299)
Source: Company, India Infoline Research

Segment wise EBIT margins (%)
Segments (as a % of sales) Q1 FY15 Q1 FY14 bps yoy Q4 FY14 bps qoq
Cigarettes 64.8 63.4 142 62.6 222
FMCG - Others (0.8) (1.1) 28 1.9 (267)
Hotels (4.9) 3.6 (844) 18.7 -
Agri Business 6.1 9.1 (296) 7.3 (112)
Paper & Packaging 21.3 21.6 (30) 14.9 640
Source: Company, India Infoline Research

Net profit marginally below expectations

Net profit for the quarter was marginally below our expectations (of Rs22.2) at Rs21.9bn – up by 15.6% yoy partly led by strong revenue growth and higher other income.

Dominance to continue… maintain Buy

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 23.9x FY16E EPS of Rs14.9, 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. The recent duty hike impact is steeper than expected but we believe it is manageable in terms of delivering EPS growth. Given this would be a third consecutive year of ~20% increase, cigarette volumes could decline by ~4% yoy in FY15. On the other hand, most states have not increased VAT this year, which would boost the bottom line. We maintain Buy with a 9-mth revised price target of Rs417 (earlier Rs398).


Financial Summary
Y/e 31 Mar (Rs m) FY13 FY14 FY15E FY16E
Revenues 2,96,056 3,28,826 3,81,053 4,33,391
yoy growth (%) 19.4 11.1 15.9 13.7
Operating profit 1,06,275 1,24,548 1,45,084 1,66,214
OPM (%) 35.9 37.9 38.1 38.4
Reported PAT 74,184 87,852 1,03,189 1,18,562
yoy growth (%) 20.4 18.4 17.5 14.9
EPS (Rs) 9.4 11.0 13.0 14.9
P/E (x) 38.0 32.3 27.5 23.9
Price/Book (x) 12.6 10.8 9.4 8.2
EV/EBITDA (x) 26.2 22.5 19.3 16.8
Debt/Equity (x) 0.0 0.0 0.0 0.0
RoE (%) 36.1 36.2 36.6 36.7
RoCE (%) 49.7 49.5 50.3 50.8
Source: Company, India Infoline Research

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