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ITC Ltd. - Q3FY14 Result Update - "ACCUMULATE"




Kisan Ratilal Choksey Shares and Securities Private Limited


21 Jan 2014





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ITC Ltd. - Q3FY14 Result Update CMP: Rs 329 Target Price: Rs 375 Recommendation: ACCUMULATE “Cigarette revenue drives topline growth” FMCG major ITC reported good set of numbers with Net sales up by 13% y-o-y to Rs.8623 crores, on the back of price hike taken up by the company in the Cigarette business, which reported a growth of 12.5% y-o-y. FMCG business increased by 16.6% y-o-y followed by Paperboards business which grew by 18.5% y-o-y. EBITDA was up by 15% y-o-y to Rs.3284 crores. Operating margins was flat on y-o-y to 38.1%, on account of increase ads spend. Net profit increased by 16% y-o-y to Rs.2385 crores on the back of higher other income (up 18.6%YoY). Cigarette business supports growth: ITC’s Cigarette-business the major business segment saw a significant improvement with its revenue increasing by 12.5% y-o-y and 10.5% q-o-q to Rs.4116crs contributing 48% of the Total revenue. Despite of decline in volumes ~2% the increase in revenue was mainly on account of price hike taken by the company. Moreover, the trigger for the market was introduction of 64mm cigarette which now contributes to around ~8% of the portfolio giving revenue stability in its core business. Non-cigarette businesses continue its double digit growth story on y-o-y basis; except Hotel business which remain subdued. Paperboards, Papers & packaging segment reported attractive growth of 18.5% y-o-y to Rs.1257crs, ITC is the market leader in this segment. Margins declined on Q-o-Q basis: EBITDA grew by 15% y-o-y and by 3.4% q-o-q to Rs.3284crs on the back of better revenue and stable raw material costs. Operating margin for the quarter is at 38.1% flat on y-o-y basis. On q-o-q basis it decreased by 276bps and is under pressure due to declining volumes in its core cigarette business, rising raw material & ad spend costs and intensive competition in FMCG segments. However, FMCG did breakeven this quarter posting profit of Rs.10crs. The Hotel business reported growth in profit up by 613.3% on q-o-q basis because of its Chennai property doing well, which was offset by declining profits from its Agri-business (down by 28%). Net Profit increased on Y-o-Y basis: Net profit was up by 16.3% y-o-y and up by 7% on q-o-q basis to Rs.2385crs on the back of higher other income (up 18.6%y-o-y and by 58.8% on q-o-q) and reduced interest burden. PAT margin was marginally up by 76bps y-o-y to 27.7%. On sequential basis it was down by 102bps mainly on account of poor operating results. Valuations & Views: We expect ITC to deliver revenue growth of 18% and 20% in FY14 & FY15 respectively driven by superior product mix & leadership position in the core business and continued investments behind brands & distribution network. At the CMP of Rs.329 per share ITC is available at a PE of 29.9xFY14E & 25.5xFY15E. We recommend ACCUMULATE rating on the stock, with a target price of Rs. 375, a potential upside of 14%.

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