ITC (Q4 FY14)

India Infoline News Service | Mumbai |

ITC recorded 11.8% yoy revenue growth during Q4 FY14 at Rs91.5bn during Q4 FY14 - almost in line with our expectations, driven by strong growth in cigarette and other-FMCG business.

CMP Rs342, Target Rs398, Upside 16.4% 
  • ITC’s recorded 11.8% yoy growth in revenues at Rs91.5bn during Q4 FY14. Cigarette revenues grew by 12.6% yoy to Rs40.8bn while EBIT margins expanded by 280bps to 34.3%. Cigarette volumes declined by ~2% yoy

  • Other-FMCG revenues grew by 13.7% yoy to Rs23.1bn, profit at EBIT level more than doubled to Rs431mn. As expected the segment broke even at EBIT level during FY14 with Rs218mn profit Vs Rs813mn loss in FY13

  • OPM expanded by ~190bps to 35% aided by 110bps drop in raw material and overhead cost respectively. Net profit matched our expectations by recording 18.2% yoy growth at ~Rs23bn

  • We expect ITC to witness a revenue/PAT CAGR of 15%/16% respectively over FY14-16. Maintain BUY with a 9-mth price target of Rs398

Result table (Standalone)
(Rs m) Q4 FY14 Q4 FY13 % yoy Q3 FY14 % qoq
Net sales 91,451 81,803 11.8 86,231 6.1
Other operating income 934 771 21.1 1,037 (10.0)
Total income 92,385 82,574 11.9 87,269 5.9
Material costs (38,696) (35,478) 9.1 (34,394) 12.5
Personnel costs (4,108) (3,434) 19.6 (4,008) 2.5
Other overheads (17,547) (16,599) 5.7 (16,024) 9.5
Operating profit 32,034 27,063 18.4 32,843 (2.5)
OPM (%) 35.0 33.1 194 bps 38.1 (306) bps
Depreciation (2,378) (2,067) 15.1 (2,259) 5.3
Interest (95) (243) (60.7) (91) 4.3
Other income 2,667 2,540 5.0 3,911 (31.8)
PBT 32,227 27,293 18.1 34,403 (6.3)
Tax (9,447) (8,014) 17.9 (10,550) (10.4)
Effective tax rate (%) (29.3) (29.4) - (30.7) -
Reported PAT 22,780 19,280 18.2 23,853 (4.5)
PAT margin (%) 24.9 23.6 134 bps 27.7 (275) bps
Ann. EPS (Rs) 11.5 9.8 17.7 12.0 (4.5)
Source: Company, India Infoline Research

Segment-wise net sales and EBIT break-up – Q4 FY14
Segments Q4 FY14
(Rs mn) Revenues yoy (%) EBIT yoy (%)
Cigarettes 40,788 12.6 25,519 20.8
FMCG - Others 23,145 13.7 431 263.0
Hotels 3,205 1.6 599 47.3
Agri Business 20,042 8.1 1,455 14.1
Paper & Packaging 12,612 19.3 1,884 0.1
Total 99,792 12.3 29,888 20.5
Inter-segment revenue (8,341) 18.1 - -
Net sales 91,451 11.8 - -
Source: Company, India Infoline Research

Cigarette and other-FMCG segment drives revenue growth

ITC recorded 11.8% yoy revenue growth during Q4 FY14 at Rs91.5bn during Q4 FY14 - almost in line with our expectations, driven by strong growth in cigarette and other-FMCG business. Despite steep price hikes, ITC managed to restrict cigarette volume decline at ~2% yoy (our expectation of ~1-2%), partly aided by higher contribution of 64mm cigarettes (~10% of sales against ~3-4% last year).

Cigarette segment registered strong 12.6% yoy revenue growth at Rs40.8bn. Other-FMCG segment recorded 13.7% yoy increase at Rs23bn driven by strong growth in atta, noodles and biscuits (double digit) segment. Paper & packaging segment recorded 19.3% yoy growth at Rs12.6bn driven by recent capacity additions in paperboards and packaging. Impacted by economic slowdown, hotels segment registered mere ~2% yoy growth (on a high base). However, we believe hotels segment will witness double digit revenue growth in FY15 driven by ARR and occupancy growth. A slower 8% yoy growth agri segment restricted further topline growth.


Lower raw material and overhead cost drive operating margins

OPM expanded by 190bps to 35% aided by ~110bps decline in raw material and overhead cost respectively. Cigarette EBIT for the quarter grew by 20.8% yoy to 25.5bn while EBIT margins expanded by 280bps to 34.3%. Other-FMCG segment posted a profit of Rs431mn at EBIT level against Rs119mn in Q4 FY13 aided by improved profitability in the foods segment. As expected the other-FMCG segment has broken-even in the current fiscal (profit of Rs218mn Vs loss of Rs813mn at EBIT level). Hotels segment registered 47.3% yoy increase at Rs599mn in EBIT on a low base, aided by superior performance by ITC Grand Chola. Paperboards division witnessed flat profit growth while agri business reported ~14% yoy increase in profit at EBIT level on a low base.


Cost analysis
As a % of net sales Q4 FY14 Q4 FY13 bps yoy Q3 FY14 bps qoq
Material costs 42.3 43.4 (106) 39.9 243
Personnel costs 4.5 4.2 29 4.6 (16)
Other overheads 19.2 20.3 (110) 18.6 61
Source: Company, India Infoline Research

Segment wise EBIT margins (%)
Segments (as a % of sales) Q4 FY14 Q4 FY13 bps yoy Q3 FY14 bps qoq
Cigarettes 34.3 31.5 281 34.6 (26)
FMCG - Others 1.9 0.6 128 0.5 136
Hotels 18.7 12.9 580 19.7 (104)
Agri Business 7.3 6.9 38 11.5 (424)
Paper & Packaging 14.0 16.7 (268) 17.3 (330)
Source: Company, India Infoline Research

Net profit matches expectations 

Net profit for the quarter was in line with our expectations at Rs22.8bn – up by 18.2% yoy partly led by improved operating efficiency and lower interest cost. The growth could have been even better but for lower other income and higher depreciation cost.

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 23x 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. 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 64mm cigarettes, break-even in other-FMCG business and steady ~15% CAGR in earnings is likely to help sustain re-rating. We maintain Buy with a 9-mth price target of Rs398.


Financial Summary
Y/e 31 Mar (Rs m) FY13 FY14E 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 1,45,179 1,66,886
OPM (%) 35.9 37.9 38.1 38.5
Reported PAT 74,184 87,852 1,02,673 1,18,540
yoy growth (%) 20.4 18.4 16.9 15.5
EPS (Rs) 9.4 11.0 12.9 14.9
P/E (x) 36.4 31.0 26.5 23.0
Price/Book (x) 12.1 10.4 9.1 7.9
EV/EBITDA (x) 25.1 21.6 18.4 16.0
RoE (%) 36.1 36.2 36.5 36.9
RoCE (%) 49.7 49.5 50.2 51.0
Source: Company, India Infoline Research
NSE 264.60 0.35 (0.13%)

***Note: This is a NSE Chart

 

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