ITC Limited - Resilience unmatched - Antique

Plain packaging could work in ITC's favor

The raging concern over the probability of plain packaging norms we believe is overdone for ITC. We believe that a plain packaging norm would be favorable for the existing players and more so, for the dominant player in the category where advertising is not permitted.

Loss in RSFT compensated by gains in KSFT

Our channels across a few states suggests that ITC's king size filter cigarette segment has been growing at a strong rate of about 14-15% despite sharp price hikes taken by the company during the last 9 months. This in turn has compensated for the loss in volumes in the regular filter segment. Consequently, we expect ITC to record flat growth in cigarette volumes during FY13.

Launch of 64mm would further make up for volume loss

ITC according to our channel checks has been test launching 64mm cigarettes across states, depending on the strength of the brand in that specific geography. For instance in Rajasthan it has launched Gold Flake super star (64mm version of Gold Flake premium) on a larger scale while in the southern markets it has launched the 64mm version of Scissors. In other geographies, the company is launching the 64mm versions of Bristol, Capstan and Wills flake. The initial response to few of these key brands has been encouraging. Though the margins on 64mm cigarettes would be relatively lower than the 69mm cigarettes, in the medium to longer term, it would arrest the volume loss in 69mm.

Expect cigarette EBIT to record 20% CAGR

We expect ITC's cigarette EBIT to grow by 20% during FY12-FY14e led by a total price hike of about 20%. This in turn would lead to an overall PAT growth of 19% during FY12-14e to INR87.8bn.

FMCG to breakeven by FY14

We expect ITC to achieve breakeven in the non-cigarette FMCG division by FY14. This would be led by a consistent improvement in margins of the packaged foods division. We estimate the packaged foods division to record about 7% EBIT margins during FY13 and 8% EBIT margins during FY14.

Valuation

In view of the strong performance of the cigarette division despite the price hikes and ITC's expected increase in the domination in cigarettes with the launch of 64mm, we believe that the division would witness a re-rating going ahead. We therefore value the division at 18x EV/EBITDA as against our current EV/EBITDA multiple of 17x. We maintain a BUY with a target price of INR322. At the CMP of INR297, the stock is trading at a PE of 31.1x FY13e and 25.2x FY14e.

Source : Equity Bulls

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