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Round Performance, but No Surprises! Q3FY14 Result Update

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Round Performance, but No Surprises! Q3FY14 Result Update ITC All round performance, but no surprises! January 17, 2014 ITC reported Adj. PAT of Rs23.9bn as all businesses reported improved performance. Cigarette volumes declined by ~2% (~3.7% in Q2) and EBIT expanded Amnish Aggarwal by 18.8%. Non‐cigarette EBIT increased by 18% (4.9% decline in Q2) as turnaround [email protected] in FMCG and 19% EBIT growth in Agri business were the key drivers. We expect +91-22-66322233 Update cigarette volumes and profit growth to further accelerate as higher prices and Gaurav Jogani demand recovery has set in. Paperboard and Hotels are likely to have a slow [email protected] recovery. Sustained FMCG sales growth at 16.6%, with continued share gains in +91-22-66322238 Result Biscuits and Noodles, is positive. We expect full turnaround in FY15 backed by a Rating BUY strong performance in Foods portfolio and rising benefits of scale. ITC remains Price Rs325 amongst the most resilient companies in the consumer pack with estimated PAT Target Price Rs381 CAGR of 19% over FY14‐16. Another year of high double‐digit excise increase Q3FY14 Implied Upside 17.2% remains a key risk. We value the stock at Rs381 (SOTP‐based on Dec15 earnings). Sensex 21,064 We maintain ‘BUY’ on the stock. Nifty 6,262 Cigarettes EBIT up 18.8%, volumes decline 2%: Cigarette business reported (Prices as on January 17, 2014) 18.8% EBIT growth with 340bps EBIT margin expansion even as volumes declined by ~2%. 64mm continued to gain traction with ~8% share in volumes. Trading data ITC has increased prices in Wills Navy Cut Kings, Bristol and 64mm Goldflake Market Cap. (Rs bn) 2,566.9 which will enable further acceleration in EBIT growth in Q4. Shares o/s (m) 7,901.8 3M Avg. Daily value (Rs m) 4297.2 Non‐cigarette business’ EBIT increases 18%: Non-cigarette business’ EBIT Major shareholders increased by 18% YoY as against a decline of 4.9% in Q2FY14. FMCG sales grew Promoters 0.00% by 16.6% in a tough environment, with EBIT profit of Rs104m. Hotels reported Foreign 19.26% 12% increase in EBIT aided by cash breakeven in ITC Grand Chola. Paperboard Domestic Inst. 34.33% sales grew by 18.5% aided by rising capacity utilisation; margins declined 310bps Public & Other 46.41% Stock Performance due to higher pulp and coal costs despite 4-5% price increase. Agri business (%) 1M 6M 12M reported 19% EBIT growth on 9.5% increase in sales driven by higher realisation Absolute 3.0 (11.8) 13.9 and superior product mix. Relative 0.8 (17.4) 8.4 Key financials (Y/e March) 2013 2014 2015E 2016E How we differ from Consensus Revenues (Rs m) 299,013 345,954 396,276 456,617 EPS (Rs) PL Cons. % Diff. Growth (%) 18.9 15.7 14.5 15.2 2015 13.1 11.1 17.9 EBITDA (Rs m) 106,275 125,538 148,208 173,280 2016 15.4 13.2 16.6 PAT (Rs m) 74,184 86,344 105,482 124,478 EPS (Rs) 9.4 10.8 13.1 15.4 Price Performance (RIC: ITC.BO, BB: ITC IN) Growth (%) 19.1 15.4 21.3 17.1 Net DPS (Rs) 5.3 6.5 8.0 10.0 (Rs) 400 Profitability & Valuation 2013 2014 2015E 2016E 350 EBITDA margin (%) 35.5 36.3 37.4 37.9 300 RoE (%) 36.1 35.9 38.0 39.4 250 RoCE (%) 36.3 36.0 38.1 39.5 200 EV / sales (x) 8.3 7.1 6.2 5.3 EV / EBITDA (x) 23.3 19.6 16.5 14.0 150 PE (x) 34.6 30.0 24.7 21.1 Jul-13 P / BV (x) 11.5 10.0 8.8 7.9 Jan-14 Jan-13 Sep-13 Nov-13 Mar-13 May-13 Net dividend yield (%) 1.6 2.0 2.5 3.1 Source: Bloomberg Source: Company Data; PL Research Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report ITC Exhibit 1: Q3FY14 Result Overview (Rs m); EBITDA grew 14.9%; Cigarettes, FMCG and Agri business are the key drivers Y/e March Q3FY14 Q3FY13 YoY gr. (%) Q2FY14 9MFY14 9MFY13 YoY gr. (%) Net Sales 87,269 77,121 13.2 78,625 240,001 216,449 10.9 Gross profit 52,875 46,351 14.1 48,842 147,134 131,275 12.1 Margins (%) 60.6 60.1 62.1 61.3 60.6 Other Exp 20,032 17,773 12.7 18,662 56,198 52,053 8.0 EBITDA 32,843 28,578 14.9 30,179 90,935 79,222 14.8 Margins (%) 37.6 37.1 38.4 37.9 36.6 Depreciation 2,259 2,052 10.1 2,209 6,621 5,889 12.4 Interest 91 252 (63.7) 21 282 622 (54.7) Other Income 3,911 3,298 18.6 2,462 8,404 6,837 22.9 PBT 34,403 29,572 16.3 30,412 92,437 79,548 16.2 Tax 10,550 9,053 16.5 9,428 28,686 24,644 16.4 Rate (%) 30.7 30.6 31.0 31.0 31.0 Adj. PAT 23,853 20,519 16.3 20,984 63,751 54,904 16.1 Reported PAT 23,853 20,519 16.3 22305 65,072 54,904 18.5 Source: Company Data, PL Research Exhibit 2: Q3FY14 Sales mix: Cigarettes are 43.1% of net sales Exhibit 3: Q3FY14: Cigarettes are 83.9% of EBIT Paper and FMCG Hotels packaging 0.3% 2.0% 13.2% Agri business Agri Cigarettes 6.5% business 43.1% 18.7% Paper and packaging Cigarettes Hotels 7.3% 3.3% 83.9% FMCG 21.8% Source: Company Data, PL Research Source: Company Data, PL Research Net sales have increased by 13.2% to Rs87.3bn. Gross margins have increased 50bps due to price hikes in Cigarettes and Paperboards and EBIT breakeven in FMCG. However, EBITDA margins increased by 60bps YoY as staff cost increased by 10bps and Other expenditure declined by 20bps to 37.6%. EBITDA increased by 14.9% to Rs32.8bn. PBT increased by 16.3% to Rs34.4bn as Other income increased by 18.6% YoY and Interest cost declined by 63.7% YoY to Rs91m. Adj.PAT increased by 16.3% to Rs23.9bn. January 17, 2014 2 ITC Exhibit 4: Cigarette EBIT up 18.8%; FMCG back in black; Paper and Hotels profits improve YoY, sustained improvement in Agri Business 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 Cigarette Volume gr % 6.0 1.5 0.5 1.5 2.5 ‐1.5 ‐3.7 ‐2.5 Sales (Rs m) 75,464 77,372 83,758 84,420 88,868 88,840 88,842 95,531 Cigarettes 32,499 33,042 33,852 36,574 36,232 35,374 37,238 41,161 FMCG 16,165 14,731 16,908 17,827 20,362 17,447 19,622 20,778 Hotels 2,858 2,324 2,170 3,095 3,155 2,499 2,470 3,154 Agri business 14,142 16,914 20,239 16,310 18,545 21,890 17,725 17,864 Paper and packaging 9,799 10,361 10,590 10,615 10,575 11,631 11,787 12,574 Sales growth (YoY) Cigarettes 17.4 15.0 14.0 13.1 11.5 7.1 10.0 12.5 FMCG 23.2 23.0 26.1 30.1 26.0 18.4 16.1 16.6 Hotels (4.8) 0.8 2.8 11.0 10.4 7.5 13.8 1.9 Agri business 30.7 (0.9) 41.1 43.1 31.1 29.4 (12.4) 9.5 Paper and packaging 6.9 8.0 5.3 8.5 7.9 12.3 11.3 18.5 EBIT (INR m) Cigarettes 17,579 18,998 20,802 22,335 21,124 22,417 24,117 26,526 FMCG (167) (388) (303) (240) 119 (189) (127) 104 Hotels 829 262 153 555 406 89 87 622 Agri business 1,056 1,714 2,597 1,726 1,275 1,993 2,846 2,054 Paper and packaging 1,958 2,647 2,825 2,286 1,881 2,516 2,208 2,317 EBIT growth (YoY) Cigarettes 19.5 20.5 20.3 21.1 20.2 18.0 15.9 18.8 FMCG NA NA NA NA NA (51.3) (58.1) (143.2) Hotels (16.8) (48.9) (64.8) (45.5) (51.0) (65.9) (43.0) 12.1 Agri business 5.8 9.1 8.8 21.9 20.8 16.3 9.6 19.0 Paper and packaging 1.1 16.6 (2.5) 1.9 (3.9) (5.0) (21.9) 1.4 EBIT Margin (%) Cigarettes 54.1 57.5 61.4 61.1 58.3 63.4 64.8 64.4 FMCG (1.0) (2.6) (1.8) (1.3) 0.6 (1.1) (0.6) 0.5 Hotels 29.0 11.3 7.1 17.9 12.9 3.6 3.5 19.7 Agri business 7.5 10.1 12.8 10.6 6.9 9.1 16.1 11.5 Paper and packaging 20.0 25.5 26.7 21.5 17.8 21.6 18.7 18.4 Source: Company Data, PL Research January 17, 2014 3 ITC Cigarette volumes decline ~2%; EBIT up 18.8% Cigarette business reported 12.5% increase in net sales and 18.8% increase in EBIT as margins expanded 340bps.
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