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investors eye

stock update

ITC

Reco: Buy

Stock Update

All negatives priced in; upgraded to Buy


Key points

Company details
Price target:

Rs365

Market cap:

Rs253,231 cr

52 week high/low:
NSE volume:
(no. of shares)

Rs410/295
80.4 lakh

BSE code:

500875

NSE code:

ITC

Sharekhan code:

ITC

Free float:
(no. of shares)

CMP: Rs316

801.6 cr

Shareholding pattern

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 chart

Results

Rs cr

Particulars

Q1FY16

Q1FY15

YoY %

Q4FY15

QoQ %

Net sales

8,587.7

9,248.3

-7.1

9,292.8

-7.6
-14.0

Total expenditure

5,201.8

5,970.7

-12.9

6,049.7

Operating profit

3,385.9

3,277.6

3.3

3,243.1

4.4

315.0

234.6

34.3

370.4

-14.9

10.5

15.2

-31.0

15.5

-32.6
3.5

Other income
Interest
Depreciation
Price performance

Profit before tax


Tax

(%)

1m

3m

6m 12m

Adjusted PAT
Exceptional item

Absolute

-1.9

Relative -1.9
to Sensex

-5.5 -16.2 -13.1


-7.5 -10.7 -19.2

Reported PAT
EPS (Rs)

258.2

231.3

11.6

249.6

3432.2

3265.7

5.1

3348.4

2.5

1,166.8

1,079.3

8.1

987.2

18.2

2,265.4

2,186.4

3.6

2,361.2

-4.1

0.0

0.0

2,265.4

2,186.4

3.6

2,361.2

0.0
-4.1

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

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July 30, 2015

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Segmental revenue performance


Business

(Rs cr)

Q1
FY16

Q1
FY15

YoY
%

Q4
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

287.7

248.7

15.7

346.4

-17.0

2,325.4

3,296.1

-29.4

1,427.9

62.9

1,265.0

1,288.5

-1.8

1,202.6

5.2

-7.0 9,754.1

4.6

Hotels
Agri - business
Paperboard, paper
and packaging
Total
Less: inter
segment sales
Gross sales

10,198.6 10,968.9
1,693.3

1,804.5

8,505.4

9,164.4

-6.2

Agri-businessPressure on revenue continues

QoQ
%

565.9

199.2

-7.2 9,188.3

-7.4

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 bean
resulting into a decline in the revenues.
Hotel businessDouble-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.

Cigarette businessBack-to-back dismal performance;


volume declined over 15% YoY but margins improved
The net revenues from ITCs cigarette business
marginally declined by 1.2% year on year (YoY) to
Rs4,149.6 crore. The ban in a few states on loose
cigarette 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.

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 businessDull
performance across parameters

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.

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 122BPS
YoY to 20.1%.

Non-cigarette FMCG businessStrong growth continues

Outlook and valuations

Though the revenues from the non-cigarette fastmoving 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).

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).

We believe a revival in the consumer spending and


better economic outlook would help to achieve better
performance ahead.

Segment-wise margin performance


Business
FMCG - cigarettes
FMCG - others
Hotels

Q1FY16

PBIT (Rs cr)


Q1FY15

YoY
%

Margins (%)
Q1FY15

Chg. in BPS

Q1FY16

2,781.1
-8.0

2,721.8

2.2

67.0%

64.8%

223.4

-15.6

-48.9

-0.4%

-0.8%

43.9

-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

3,254.2

3,171.4

2.6

38.3%

34.6%

365.4

Total

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July 30, 2015

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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

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

EV/Sales (x)

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

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July 30, 2015

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December 26, 2014

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