ITC-Jul30_15

7/17/2019 ITC-Jul30_15

http://slidepdf.com/reader/full/itc-jul3015 1/4

2Sharekhan Home NextJuly 30, 2015

investor’s eye stock update

Company details

Price chart

Shareholding pattern

Price performance

(%) 1m 3m 6m 12m

Absolute -1.9 -5.5 -16.2 -13.1

Relative -1.9 -7.5 -10.7 -19.2

to Sensex

ITC Reco: Buy

Stock Update

All negatives priced in; upgraded to Buy CMP: Rs316

Key points

Cigarette business continues to disappoint; FMCG and hotel businesses show

improvement: Q1FY2016 was yet another quarter of muted performance by

ITC, reflected in an 8% decline in revenues, mainly due to a 1.2% decline in

cigarette business revenues (sales volume declined in double digits) and 29%

decline in agriculture business revenues. The OPM improved by 400BPS to 39.4%.

The cigarette business’ PBIT margins improved by 233BPS YoY to 67%, while the

agriculture business margins improved by 391BPS YoY to ~10%. The improvement

in the OPM and the strong growth in the other income by almost 34% led to a

3.6% Y-o-Y growth in the reported PAT to Rs2,265 crore.

Near-term pressures continue; focusing on other segments: It was another

dismal performance by the company, attributed to a double-digit volume decline

in its core cigarette business. The ban on selling loose cigarettes in few states

(contributing major proportion of revenues) along with the overhang of stringent

action from the government and further excise duty hike could act as a key

hurdle. However, any gradual improvement in volume would help the company

to get back on track. In addition, the continuous focus on other verticals (through

expansion in product folio and investment in new products to improve product

mix) will support the financial performance over the long term.

Steep valuation to its peers; upgraded to Buy post-correction: The stock has

underperformed in the recent quarters due to muted financial performance.However, at the current level, we believe it has factored in all the near-term

negatives and is currently trading at 20x its FY2017E earnings (at a steep discount

to its peers). Therefore, we upgrade the stock to Buy with an unchanged price

target of Rs365 (purely based on valuation).

Price target: Rs365

Market cap: Rs253,231 cr

52 week high/low: Rs410/295

NSE volume: 80.4 lakh(no. of shares)

BSE code: 500875

NSE code: ITC

Sharekhan code: ITC

Free float: 801.6 cr(no. of shares)

Results Rs cr

Particulars Q1FY16 Q1FY15 YoY % Q4FY15 QoQ %

Net sales 8,587.7 9,248.3 -7.1 9,292.8 -7.6

Total expenditure 5,201.8 5,970.7 -12.9 6,049.7 -14.0

Operating profit 3,385.9 3,277.6 3.3 3,243.1 4.4

Other income 315.0 234.6 34.3 370.4 -14.9

Interest 10.5 15.2 -31.0 15.5 -32.6

Depreciation 258.2 231.3 11.6 249.6 3.5

Profit before tax 3432.2 3265.7 5.1 3348.4 2.5

Tax 1,166.8 1,079.3 8.1 987.2 18.2

Adjusted PAT 2,265.4 2,186.4 3.6 2,361.2 -4.1

Exceptional item 0.0 0.0 0.0

Reported PAT 2,265.4 2,186.4 3.6 2,361.2 -4.1

EPS (Rs) 2.8 2.7 2.8 2.9 -3.5

GPM (%) 63.1 57.0 610BPS 60.6 250BPS

OPM (%) 39.4 35.4 400BPS 34.9 450BPS

7/17/2019 ITC-Jul30_15




Segmental revenue performance (Rs cr)

Business Q1 Q1 YoY Q4 QoQ FY16 FY15 % FY15 %

FMCG - cigarettes 4,149.6 4,201.1 -1.2 4,210.7 -1.5

FMCG - others 2,171.0 1,934.6 12.2 2,566.5 -15.4

Hotels 287.7 248.7 15.7 346.4 -17.0

Agri - business 2,325.4 3,296.1 -29.4 1,427.9 62.9

Paperboard, paper

and packaging 1,265.0 1,288.5 -1.8 1,202.6 5.2

Total 10,198.6 10,968.9 -7.0 9,754.1 4.6

Less: inter

segment sales 1,693.3 1,804.5 -6.2 565.9 199.2

Gross sales 8,505.4 9,164.4 -7.2 9,188.3 -7.4

Cigarette business—Back-to-back dismal performance;

volume declined over 15% YoY but margins improved

• The net revenues from ITC’s cigarette business

marginally declined by 1.2% year on year (YoY) to

Rs4,149.6 crore. The ban in a few states on loosecigarette selling as well as a double-digit volume decline

affected revenue growth. However, a price hike helped

marginally in terms of revenue decline. The price hike

aided the profit before interest and tax (PBIT) to

improve by 223 basis points (BPS) to 67% in the quarter.

• The company will continue to feel pressure in near

term in its cigarette business both on the volume and

growth fronts. In addition, any further rise in the excise

duty by the government would entail the company to

pass it on to the consumers, which may affect volume

growth in the coming quarters.

Non-cigarette FMCG business—Strong growth continues

• Though the revenues from the non-cigarette fast-

moving consumer goods (FMCG) business grew by 12.2%

to Rs2,171 crore, yet it reported a loss of Rs8 crore

(improved from a loss of Rs15.6 crore in Q1FY2015).

• We believe a revival in the consumer spending and

better economic outlook would help to achieve better

performance ahead.

Segment-wise margin performance

Business PBIT (Rs cr) YoY Margins (%) Chg. in BPS

Q1FY16 Q1FY15 % Q1FY16 Q1FY15

FMCG - cigarettes 2,781.1 2,721.8 2.2 67.0% 64.8% 223.4

FMCG - others -8.0 -15.6 -48.9 -0.4% -0.8% 43.9

Hotels -7.3 -12.1 -40.0 -2.5% -4.9% 234.1

Agri - business 233.9 202.5 15.5 10.1% 6.1% 391.4

Paperboard, paper and packaging 254.4 274.9 -7.4 20.1% 21.3% -122.1

Total 3,254.2 3,171.4 2.6 38.3% 34.6% 365.4

Agri-business—Pressure on revenue continues

• Despite a 29% year-on-year (Y-o-Y) decline in the revenues

of agri-business to Rs2,325 crore, the PBIT margin of the

business improved by 391BPS YoY to 10.1%, which led to

a 15.5% Y-o-Y growth in PBIT to Rs233.9 crore (due to

superior product mix and higher realisations). There was

a lack of trading opportunities in wheat and soya beanresulting into a decline in the revenues.

Hotel business—Double-digit top line but sluggish

operating performance

• The hotel business saw a 15% Y-o-Y growth in the

revenues to Rs287.7 crore during the quarter, due to a

strong growth in room occupancies and food &

beverage revenues.

• It reported a PBIT loss of Rs7.3 crore (but improved

on a Y-o-Y basis from a loss of Rs12 crore).

• There is continues weakness seen in the domestic

market due to oversupply and slowdown in the

economy, resulting into lack of demand of hotel rooms.

Paperboard, paper and packaging business–Dull

performance across parameters

• The paperboard, paper and packaging business

revenues declined by 1.8%, due to a slowdown in the

FMCG and cigarette industries along with a reduction

of import duty under various regional free trade

agreements. The PBIT margin also declined by 122BPSYoY to 20.1%.

Outlook and valuations

Steep valuation to its peers; upgraded to Buy: The stock

has underperformed in recent quarters due to muted

financial performance. However, at the current level, we

believe it has factored in all the near-term negatives and

is currently trading at 20x its FY2017E earnings (at a steep

discount to its peers). Therefore, post-correction we have

upgraded the stock to Buy with an unchanged price target

of Rs365 (purely based on valuation).

7/17/2019 ITC-Jul30_15




Valuations (stand-alone)

Particulars FY2013 FY2014 FY2015 FY2016E FY2017E

Net sales (Rs cr) 29,901.3 33,238.6 36,507.4 41,392.2 47,990.3

Net profit (Rs cr) 7,418.4 8,785.2 9,607.7 10,754.0 12,590.1

EPS (Rs) 9.4 11.0 12.0 13.4 15.7

Y-o-Y change (%) 19.1 17.7 8.5 11.9 17.1

PE (x) 33.8 28.7 26.4 23.6 20.2

P/BV (X) 11.6 9.9 8.6 7.3 6.1

EV/EBIDTA (x) 23.7 20.2 18.9 16.2 13.8

EV/Sales (x) 8.4 7.6 7.0 6.0 5.1

RoCE (%) 45.4 45.2 41.7 40.2 39.7

RoNW (%) 36.1 36.2 33.7 32.3 32.0

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

7/17/2019 ITC-Jul30_15


9Sharekhan Home NextDecember 26, 2014

Disclaimer

This document has been prepared by Sharekhan Ltd. (SHAREKHAN) and is intended for use only by the person or entity to which it is addressed to. This document may contain confidential and/or privileged material and is not for any type of circulation and any

review, retransmission, or any other use is strictly prohibited. This document is subject to changes without prior notice. This document does not constitute an offer to sell or solicitation for the purchase or sale of any financial instrument or as an official

confirmation of any transaction. Though disseminated to all customers who are due to receive the same, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report.

The information contained herein is obtained from publicly available data or other sources believed to be reliable and SHAREKHAN has not independently verified the accuracy and completeness of the said data and hence it should not be relied upon as such.While we would endeavour to update the information herein on a reasonable basis, SHAREKHAN, its subsidiaries and associated companies, their directors and employees (“SHAREKHAN and affiliates”) are under no obligation to update or keep the information

current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affiliates from doing so. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment

decision. Recipients of this report should also be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The user assumes the entire risk of any use made of this information. Each recipient

of this document should make such investigations as he deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his ownadvisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of SHAREKHAN may have issued other

reports that are inconsistent with and reach different conclusion from the information presented in this report.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary tolaw, regulation or which would subject SHAREKHAN and affiliates to any registration or licencing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons

in whose possession this document may come are required to inform themselves of and to observe such restriction. Either SHAREKHAN or its affiliates or its directors or employees/representatives/clients or their relatives may have position(s), make market, act

as principal or engage in transactions of purchase or sell of securities, from time to time or may be materially interested in any of the securities or related securities referred to in this report and they may have used the information set forth herein beforepublication. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or any third party involved

in, or related to, computing or compiling the information have any liability for any damages of any kind. The analyst certifies that all of the views expressed in this document accurately reflect his or her personal views about the subject company or companies

and its or their securities and do not necessarily reflect those of SHAREKHAN. Further, no part of the analyst’s compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this document.

Compliance Officer: Ms. Namita Amod Godbole; Tel: 022-6115000; e-mail: [email protected] • Contact: [email protected]

Documents

ITC-Jul30_15