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Spark Capital: ITC 3QFY13 Result Review - Another good quarter, Maintain BUY




Spark Capital Advisors(India) Private Limited


20 Jan 2013





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Another good quarter, Maintain BUY ITC posted another quarter of good results with over 20% yoy earnings growth. Revenue growth was broad based with all segments reporting healthy growth rate. Cigarette volume growth at ~1% was in line with expectation. Profit growth was largely driven by cigarette price increase. Cigarette business margins expanded by 402 bps yoy. Non cigarette FMCG business delivered a strong revenue growth of 30% yoy on the back of ~18-20% yoy volume growth. Segment Highlights Cigarettes: ITC continues to leverage on the pricing power in cigarettes to drive strong earnings growth. With hefty price increase getting absorbed we expect cigarette volumes to grow ~1% yoy for FY13. The small (64 mm) filter cigarettes launched at price points of Rs2 -3 per stick is currently available in select 17-18 cities and shall be further expanded across the country. Non-Cigarette FMCG: The FMCG business continues to register broad based growth with both, the foods and Personal care product baskets exhibiting strong volume traction. We expect the company to further expand offerings in the personal care space in the coming quarters. 3Q saw launches of body lotions, moisturizer, skin toner in skin care space and deodorants in body care. Moving towards a potential breakeven by end FY14 the FMCG business maintained a trend of reducing loss. Agri Business: Higher sales of wheat and slight recovery in leaf tobacco prices drove over 40% yoy increase in sales of Agri business. The segment posted lower profitability for 3Q with EBIT margins at 10.6% vs 12.4% in 3QFY12. Hotels: The Hotels segment performance continued to be subdued with ARR’s and occupancies flattish yoy. The newly opened 600 room luxury property in Chennai ‘ITC Grand Chola’ helped post 11% yoy revenue growth. With flattish like to like revenues and operating costs of the new property the hotel business eroded profitability yoy. Pursuing plans to augment hotel inventory, construction is underway for premium properties at Kolkata, Bangaluru and Gurgaon to go on stream over the next 2-3 years. Paperboard & Packaging: As expected the segment posted a single digit revenue growth due to capactiy constraints. Also, increase in wood price led segment profits to be flat yoy. With capacity expansions at Bhadrachalam and Haridwar for Paperboards and Packaging respectively expected to become operational by March/ April’13 we expect the business to come back to 15-20% growth rate. Valuations and View: While we expect a low increase in excise on cigarettes in the upcoming Union budget, it is a key monitorable for ITC. We have high comfort on ITC maintaining ~20% earnings growth momentum and hence prefer it to HUL over the next 12-15 months. We maintain BUY recommendation on the stock with a SOTP based price target of Rs336 at which it shall discount FY14E and FY15E earnings by 29.1x and 23.8x respectively.

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