India Equity Research | FMCG
Result Update
ITC
INR 187
Cigarettes up-trading exceeds expectation
ACCUMULATE
July 31, 2008
Gautam Duggad
Strong topline; PAT below estimates
+91-22-6620 3025
ITC’s Q1FY09 results were subdued on account of higher-than-anticipated losses in the
[email protected]
FMCG business. Net sales grew 17.3% Y-o-Y to INR 39 bn, ahead of our estimates, while
PAT numbers, with a 4.4% decline at INR 7.48 bn, were below our estimates. EBITDA
Abneesh Roy
declined sharply by 500bps, led by 310bps decline in gross margin, on account of higher
+91-22-6620 3141
raw material costs, aggressive brand spends, higher distribution expenses on Cigarettes
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increasing contribution of low margin non-cigarettes business. EBIT margins improved
382bps, 248bps, and 33bps in hotels, paper, and agri business, respectively. However,
Ajay Thakur
FMCG-Others and cigarettes reported 950bps and 85bps Y-o-Y decline, respectively.
+91-22-6620 3031
[email protected]
Cigarettes resilient; Hotels, Paper improve margins; FMCG-Others bleed
ITC’s cigarettes performance was well ahead of our and consensus estimates with ~80%
up-trading and ~3% volume loss; weighted average price hike has been ~1.5%.
Further, filter cigarette volumes grew ~19%, implying non filter to filter conversion of
Reuters
:
ITC.BO
Bloomberg
:
ITC IN
:
239 / 151
about ~80%, well ahead of our expectation of 50% conversion. This is a strong
reflection of ITC’s dominance in filter portfolio with more than 80% market share and we
expect pace of up-trading to improve further. Consequently, we now forecast just 1%
volume decline in Cigarettes from our earlier assumption of 9%; 12% sales growth,
aided by price hikes of 5% and realization growth on account of better portfolio mix, in
FY09E. 90bps Y-o-Y decline in Cigarettes EBIT margin can be attributed to higher
distribution expenses to augment up-trading, higher point of sale (POS) spend and
Market Data
52-week range (INR)
Share in issue (mn)
:
3,768.6
M cap (INR bn/USD mn)
:
704 / 16,576
Avg. Daily Vol. BSE/NSE (‘000) :
6,910.3
write-down of packaging costs associated with non-filters cigarettes.
Share Holding Pattern (%)
FMCG-Others reported INR 1.22 bn losses for the quarter on account of higher ad spend
in personal products. We expect brand investments to continue and revise upwards our
Promoters
:
0.0
forecast of EBIT losses from INR 3.2 bn to INR 4.1 bn. Hotels posted ~380 bps EBIT
MFs, FIs & Banks
:
38.2
margin improvement.
FIIs
:
13.4
Others
:
48.4
Sensex
Stock
Stock over
Sensex
1 month
10.2
2.4
(7.9)
anticipated losses in FMCG–Others, we are revising down our EPS estimates by 3.5% for
3 months
(18.8)
FY09E. We roll forward our SOTP to FY10. Our revised sum-of-the-parts (SOTP) - based,
12 months
(8.1)
Outlook and valuations: Strong PUFF; maintain ‘ACCUMULATE’
We are impressed with the core cigarette performance and expect margin expansion
Relative Performance (%)
driven by price hikes and better portfolio mix, going forward. We expect Hotels and Agri
business to soften in subsequent quarters on account of lower occupancy and
moderation in commodity exports, respectively. However, owing to higher-than-
(14.6)
4.3
10.0
18.1
one-year price target stands at INR 210. At CMP of INR 187 the stock is trading at P/E of
20.3x and 17.1x and EV/EBITDA of 13.2x and 11.0x our FY09E and FY10E, respectively.
We maintain our ‘ACCUMULATE’ recommendation and suggest entry into the stock on
any weakness on the back of lower earnings.
Financials
Year to March
Q109
Q108 % Change
Net rev. (INR mn)
38,997
33,252
EBITDA (INR mn)
11,271
7,487
2.0
Net profit (INR mn)
Diluted EPS (INR)
Q408 % Change
FY08
FY09E
(0.9) 146,591
171,288
17.3
39,344
11,276
(0.0)
10,447
7.9
45,681
50,302
7,829
(4.4)
7,356
1.8
31,578
34,712
2.1
(4.4)
2.0
1.8
8.4
9.2
Diluted P/E (x)
22.3
20.3
EV/EBITDA (x)
14.7
13.2
ROAE (%)
27.9
26.6
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