Buy ITC - Motilal Oswal

ITC (ITC IN; Mkt Cap USD24.2b, CMP Rs301, Buy)

ITC's 1QFY11 net sales grew 17% YoY to Rs48.5b led by better-than-expected growth in cigarettes (up 12.4%), FMCG (up 34%) and the agri business (up 43%). EBITDA margins expanded 80bp to 33.8% as EBITDA grew 16% YoY to Rs16.4b. PAT grew 22% to Rs10.7b aided by a 150bp decline in the tax rate.

- Cigarette volumes fall 3.5%; increased prices, improved mix boost realizations: We estimate cigarette volumes de-grew ~3.5% YoY (against our estimate of 4.5%) due to sharp price increases. Net sales grew 12.4% to Rs24.8b led by ~15% realization growth. The growth was due to a price increase (~16% YoY) and improved mix, which were partly offset by higher excise and VAT (~10%). The near-term outlook on cigarette volumes is uncertain due to a sharp price increase, though lower-than-expected decline is a positive.

- Other businesses perform strongly; paperboard margins a positive surprise: New FMCG business sales were up 32% YoY at Rs10b and EBIT loss declined 11% to Rs893m (4QFY10 loss of Rs787m). The agri business posted a 44% increase in sales to Rs13.5b and EBIT grew 23.2%. Margins contracted 150bp to 9.1% due to higher proportion of soya trading. Hotel business revenue grew 21% to Rs2b as a revival in the economic environment propped up occupancy (~60%) with ARR at Rs7,500. Paper and paperboard sales rose 13% YoY to Rs7.9b and EBIT grew 47% YoY to Rs1.9b, enabling margin expansion of 550bp.

- Upgrading estimates by 2-3%; SOTP based target price of Rs318; Buy: We are upgrading our FY11 and FY12 estimates by 2-3% to factor in (1) higher net realization and margins in cigarettes, and (2) stronger sales traction in new FMCG and agri businesses. Our revised EPS estimates for FY11 are Rs12.6 (Rs12.4 earlier) and for FY12, Rs15 (Rs14.6 earlier). We are upgrading our SOTP-based target price to Rs318 (earlier Rs298) due to increased EBITDA in the cigarette business, a higher multiple for hotels and the paper business (in line with other hotel and paper companies). The stock trades at 23.6x FY11E EPS and 19.8x FY12E EPS. Maintain Buy.

Source : Equity Bulls

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