Buy ITC - Padmakshi Financial Services

Key Highlights

ITC reported net sale of Rs. 6195 Crs. for Q3FY12 (up 14% y-o-y) & (up 22% q-o-q) in line with our expectations mainly driven by the price hikes on cigarette that were taken during the previous quarters to neutralize the effect of increase in VAT rates in various states and pick up in the hotel business.

The company also saw 48% growth y-o-y in its other income to Rs. 285 Crs. on the account of sale of investments and higher yields. Total expenses at Rs. 3867 Crs. rose by 11 % y-o-y on account of higher manufacturing expenses – Rs. 1396 Crs. (grew 20% y-o-y); a result of higher input costs.

However effective cost management practices implemented by the company in the form of price hikes have lead to improved EBITDA margins by 229 bps y-o-y.

Net Profit which stood at Rs. 1700 Crs. saw margin improvement of 200 bps over the previous year’s PAT margin of 25.47%.

Cigarettes continue to be the cash cow for the company

ITC's cigarette business, the largest contributor (60%) to the revenue continued to grow at 11% y-o-y. In an attempt to immune itself from the excise hike of 15% on tobacco products in the upcoming Union Budget., ITC raised the prices of certain brands by up to 15%.

Price of Classic has increased from Rs. 50 to Rs. 55; Wills Navy Cut now costs Rs. 44 as against Rs. 40; Bristol hiked by Rs. 3 to Rs. 28 for a pack of 10.

Its flagship brand Gold Flake Kings (GFK) saw a rise as much as 15% to Rs. 110 from Rs. 96 for a pack of 20 sticks.

In spite of the higher price across all cigarette brands, we believe this would not hinder the volume growth for FY13, considering the fact that ITC commands 78% market share in terms of volume and 87% in terms of value.

The margins in this segment improved 247bps y-o-y and 220 q-o-q to 31.7%, as a result of price hikes.

Taking into consideration the initiatives taken by the company across the brand portfolio in terms of pack modernization, improvement in smoke profile and introduction of new brands and variants such as 'Player's', 'Classic Citric Twist' and 'Hero' during the quarter, we expect an improved overall market share and a growth of 7% in this segment totaling the revenue to Rs. 22800 Crs. for current fiscal.

Valuation

ITC's Q3FY12 performance has been in line with our estimates hence we continue to maintain our view on the stock with a target price of Rs. 234. However we would consider re-rating if there would be a key take away in the upcoming budget in the current quarter which would be critical for ITC's cigarette business, given the possibility of an increase in excise rates. At CMP of 205, the stock is trading at 22.38x FY13E EPS of Rs. 9.16.

Source : Equity Bulls

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