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Spark Capital: ITC 2QFY14 Result Review - Old habits don’t die fast, Maintain BUY




Spark Capital Advisors(India) Private Limited


29 Oct 2013





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ITC: Old habits don’t die fast, Maintain BUY ITC reported revenues of Rs.~78.6bn (+8.8% y-o-y, +6.1% q-o-q), operating profits of Rs.30.1bn (+12.3% y-o-y, +8.1% q-o-q) and PAT of Rs.~21bn (+14.1% y-o-y, +10.8% y-o-y). Cigarette segment recorded 10% growth, which we believe has come of 16% pricing increase and ~6% decline in volumes. Gross margins expanded 176bps y-o-y which assisted in EBITDA margins expanding by 118bps. Segment Highlights Cigarettes: Volumes declined ~5-6% as per our estimates as the company affected an another round of price increase this quarter. Though we expect the second half to be robust in terms of volumes, we see volumes declining ~3% in FY14. Much anticipated 64mm filter cigarettes have been phenomenal success and contributes to ~7% of overall cigarette sales. Though they have cannibalized a bit of 84mm users, they remain vital in converting non -cigarette tobacco users. Non-Cigarette FMCG: ITC continues to fill shelves in the FMCG segment with plethora of new launches. Incessant A&P spend assisted in Aashirvaad, Bingo and Yippee brands recording strong sales this quarter. Losses were halved on a y-o-y basis to 189mn this quarter, turnaround in terms of profits however we believe have to wait until FY15. Agri Business: Positive mix and surge in leaf tobacco exports assisted in Agri business margins expanding ~9.6% y-o-y. Revenues though were subdued as base quarter had affects of higher wheat exports due to global shortage. Hotels: The Hotels segment performance continued to be subdued with ARR’s and occupancies flattish y-o-y. The newly opened luxury property in Chennai ‘ITC Grand Chola’ led to revenue growth. Given the prevailing tough macro economic climate, the company signed of few asset light properties under its ‘welcomehotel’ brand to ease up margin pressure. Construction of Gurgaon (expected to be completed by 1HFY15), Kolkata and Bengaluru properties on track. Paperboard & Packaging: Newly commissioned Bhadrachalam (new paper machine) facility has enabled a revenue growth of 11.3% in 2QFY14. Segments margins though remained subdued due to steep increase in wood, coal and chemical costs, margins going forward are expected to remain steady going ahead . Valuations and View: Though concerns over fragility of cigarette volume growth has led to confidence on the stock tumbling, we see the cigarette volume concern is a short term phenomena and should reverse in 2HFY14. We maintain a positive stance on the stock with a Buy rating and a revised SOTP based price target of Rs374

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