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Spark Capital - ITC 4QFY14 Results Review: Cigarette volumes expected to revive, Maintain BUY [TP: 401; Upside:~16%]




Spark Capital Advisors(India) Private Limited


28 May 2014





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ITC 4QFY14 Results Review: Cigarette volumes expected to revive, Maintain BUY [TP: 401; Upside:~16%] ITC reported revenues of Rs.~92bn (+12% y-o-y), operating profits of Rs.~32bn (+18% y-o-y) and PAT of Rs.~23bn (+18% y-o-y). Cigarette segment recorded 12.6% y-o-y growth, which we believe has come of ~15-16% pricing mix change and ~3% decline in volumes. Other FMCG business recorded ~14% y-o-y growth and operating profit of Rs.~431mn. Growth and margins in Hotels, Agri business and Paperboards/Packaging were in line with estimates. BOD has recommended a dividend of Rs.6/share for FY14, pay-out of ~54% Segment Highlights Cigarettes: Volumes reeled under pressure for another quarter given the steep price hike of ~20% which were affected across brands post budget. Margins in the cigarette business expanded 426bps to ~62.6%, indicating that current price hikes suffice for the existing excise and VAT rates. We believe contribution of 64mm has increased significantly (~10% of cigarette sales) given that excise duty increased by only ~9% Vs ~11% rise in cigarettes gross revenue. Led by minimal price increase and increasing traction for 64mm, we believe cigarette volumes should bounce back albeit to low single digits in near term. No price rise anticipated until any change is made to the excise/VAT rates. Non-Cigarette FMCG: Despite lower revenue growth, FMCG business recorded operating profit of Rs.~218mn in FY14 led by operating leverage and supply chain efficiencies. Prospects though remain challenging considering the decline in consumer discretionary spending and EBIT margins could be under pressure as brand investments increase. Agri Business: Revenues grew ~29% y-o-y in FY14 led by entering into new markets. Flat demand and rise in leaf prices kept the overall market challenging. Slight EBIT margin expansion (~60bps) in FY14 led by improvement in mix. Hotels: Subdued macro environment and weak pricing scenario led to tepid growth & margins in FY14. ITC though continues to invest in properties which we believe could lead to improved growth and margins when economy recovers. Paperboard & Packaging: Better volumes and improved mix led to ~15% growth in FY14. However steep price hike in key raw materials as wood, coal and chemicals continue to pressurize margins. Valuations and View: Despite a few worrying questions emerging on inelasticity of cigarette volumes, we believe underlying demand drivers have not materially changed. With further price hikes ruled out for short term, volumes should re-emerge in near term. Hotels and FMCG business to improve with macro economic recovery. We value the stock on a SOTP basis on FY16E and revise our target price upwards to Rs.401, ~16% upside from CMP.

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