ITC - Cig volumes surprise - Prabhudas Lilladher

Cigarettes volumes up ~1%: ITC's Q1FY13 results met our expectations, with Sales, EBITDA and PAT at Rs66.5bn (16.5 % YoY), Rs23.07bn (23.2%YoY) and Rs16.02bn (20% YoY) v/s our expectations of Rs66.6bn, Rs22.1bn and Rs16.08bn, respectively. Cig volumes grew ~1% better than our expectations of ~2% decline. This is impressive, given the recent ~13% price increases taken post budget. Cig EBIT growth of 20.5% and margin expansion of 260bps once again underscores the pricing power enjoyed by ITC. Non-Cig FMCG sales grew by 23%, led by volumes and improved mix, while losses halved for the quarter. Hotels continued to post weak numbers with flat revenues and 50% EBIT decline driven by start-up costs for its Chennai property. Agri division posted revenue decline (-1%) on account of surplus leaf tobacco inventory and adverse commodity price comps. However, richer mix aided the 90bps margin expansion.

- FMCG losses decline 75%; Cig margins up 260bps: Cigarette posted strong 260bps improvement in EBIT margins driven by price hikes, better product mix, softer RM costs and eighth consecutive quarter of margin expansion, underscoring ITC's pricing power once again. Non-Cig FMCG growth was driven by branded packaged food, personal care and stationery unit. Packaged Foods witnessed mixed improvement across segments, in turn, aiding improvement in profitability as losses reduced 49% to Rs388m. As per management, Sunfeast Yippee noodles continued to gain share. Paper division reported a modest 9% growth, constrained by capacity (capacity addition of 1lakh tons expected in Q4FY13e) but posted a strong 180bps YoY and 550bps QoQ margin expansion. Hotels performance was impacted by weak macros and increased supply.

- Maintain 'BUY' with a revised SOTP of Rs275: We maintain our estimates for now despite better-than-expected Cig volumes and margins which enhances near-term earnings visibility for the stock. We are modelling 2% volume declines for FY13e. Continued traction in non-FMCG sales and improving profitability along with consistent and higher pay-out ratio are the other positives. ITC is also relatively well insulated from potential monsoon-related headwinds for the consumer sector. Performance of <65mm Cig is a key monitorable.

Source : Equity Bulls

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