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MOSL: ITC (Buy) - Beats expectation, cigratte margins expand further




Motilal Oswal Securities Ltd.


26 May 2014





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ITC 4QFY14: Beats expectation, cigratte margins expand further (ITC IN, Mkt. Cap USD46.6b, CMP INR342, TP INR400, 17% Upside, Buy) ITC’s 4QFY14 performance was tad ahead of our expectations with 4% beat on PAT. Revenues grew 11.9% to INR 92.4b (est INR 93.4b); EBITDA grew 18.4% YoY to INR32.0b (est. INR 31.3b), while Adj. PAT grew 18.2% to INR22.8b (est. INR21.9b). Cig volumes declined ~3% while Cigarette EBIT grew robust 21% and posted 280bp margin expansion to 34.3% (13th consecutive quarter of margin exp). 64mm portfolio continues to perform well and now crossed 10% salience. EBITDA margins expanded 190bp to 34.7% (est. 33.6%) led by 280bp expansion in Cigarettes, 130bp in FMCG – Others, 580bp in Hotels, 40bp in Agri. Non-Cig FMCG posted 13.7% sales growth (lowest since 1Q10) due to high base (26% growth in base) and overall consumption slowdown. Segment EBIT went up 3.6x YoY and posted higher ever EBIT of INR431m. On a full year basis, ITC reported EBIT of INR 218m, maiden annual profit. Agri revenues grew 8.1% driven by leaf tobacco exports while margins expanded 40bp. Hotels continued to suffer from weak macros – 1.6% revenue growth, but material EBIT margin expansion of 580bp led by Chennai property. Paper segment revenue grew 19.3% while EBIT remained flat (290bp margin decline) due to cost inflation in Wood pulp. Continued robust Cig EBIT growth and margin expansion coupled with positive segment EBIT in non-Cig FMCG are the key highlights of the quarter. Within our overall cautious stance on the sector, we believe ITC offers best risk reward profile given the earnings visibility. ITC closed FY14 with profit growth of healthy 16.6%. Recovery in Cig volumes remain key concern. Excise duty changes in the forthcoming budget will be near term trigger for the stock. Maintain our top sector pick and reiterate Buy with a 12 month forward TP of INR400 (27x FY16E EPS), an upside of 17%.

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