Margin PAT (Rs Margin

Transcription

1 4 Recommendation BUY Best bet at current FMCG space, Attractive Valuations; BUY CMP Rs. 345 ITC posted a good quarter in terms of Net Sales/Gross Profit/EBITDA/PAT increased by 11.8%/13.9%/18.4%/18.2% YoY respectively. Further, Gross Target Price Rs. 429 margin improved by 110bps YoY to 57.7% and down by 240bps QoQ. Sector FMCG Improvement in Cigarette EBIT margin by 430bps YoY; however volume declined by 3% in Q4FY14 (the decline was 2% in Q3FY14). Stock Details In the last three months, ITC has underperformed Sensex by 11.7% since BSE Code its Q3FY14 result. This underperformance is driven by expensive valuation, slowdown in cigarette volume, shift towards high beta sectors. NSE Code ITC However, we believe valuations have corrected after this Bloomberg Code ITC IN underperformance and currently trade at attractive valuations. We feel Market Cap (Rs cr) the discount is not justified as ITC provides strong earnings visibility on Free Float (%) 100% account of pricing power in cigarette business, expected reversal in 52- wk HI/Lo (Rs) 387/285 decline in cigarette volume and break-even in foods/personal products. We have introduced FY16E numbers. We expect net sales to grow by Avg. volume BSE (Quarterly) % in FY15E and by 16.6% in FY16E. At CMP, ITC is trading at a PE of Dividend (FY13) Rs per share 25.3x FY15E & 21.8x FY16E. The success of 64mm cigarette, turnaround in Face Value (Re) 1.00 Other FMCG business to improve overall RoE and strong pricing power, Shares o/s (Crs) should be key decisive factor for the stock going forward. We have revised our TP of Rs 429 based on SOTP (FY16E) with a BUY rating. Relative Performance 1Mth 3Mth 1Yr The cigarette net revenue growth was up by 12.6% YoY to Rs cr. ITC -3.2% 7.0% 3.0% However, business grew its profitability by 20.8% YoY primarily led by Sensex 7.9% 18.7% 25.5% premiumization and better revenue mix which was off-set by 3% volume decline. Despite heavy taxation inflicted on cigarettes last year, ITC continue to maintain its average +18% EBIT growth mainly driven by the increased share of 64mm cigarettes and decline in RSFT (regular size filter tip) cigarettes during FY14. We feel that, with good growth in 64mm cigarettes which contributes 7%- 8% to the total cigarette revenue and Kings segment, the volume decline would be curtailed. More importantly, 64mm segment is not diluting the margins. We expect volume to recover in FY15E on the account of a) sustained growth in the 64mm cigarette segment while volume decline in other segment is slowing, b) the growth in 64mm segment is attributed to the shift from Shareholding Pattern 31 st Mar 14 bidis/illicit cigarette and less from cannibalization, c) effective ban on the Gutkha is likely to support volume growth. Thus benefitting ITC; in our view. Institutional (Incl. FII) 54.7% ITC's non-cigarette FMCG revenue grew by 13.7% YoY. However, to our Corporate Bodies (incl. 35.0% foreign) surprise, the business posted profit of Rs 43.1cr in Q4FY14 as against Rs 11.9cr Public & others 10.3% in Q4FY13, jump by 4x YoY. Despite quarterly fluctuation in the Other FMCG Ruchita Maheshwari business and broad-based slowdown in the staples category, ITC had achieved break-even in FY14. The segment had posted a profit of Rs 21.8cr in FY14 as Research Analyst compared to loss of Rs 81.3cr in FY13. Further, Agri business reported a revenue growth of 8.1% YoY to Rs cr in Q4FY14 primarily due to ruchita.maheshwari@nirmalbang.com improved realization and higher volumes. Paperboard reported a revenue increase by 19.3% YoY to Rs cr in Q4FY14 aided by higher volumes and product mix enrichment. Year Net Sales Growth Margin PAT (Rs Margin EV/Sales EBIDTA EPS (Rs.) P/E (x) (cons) (Rs cr) (%) (%) cr) (%) (x) RoE FY % % % % FY % % % % FY15E % % % % FY16E % % % % 1 P a g e

2 Segment Highlights: The Cigarette segment reported an EBIT growth of 20.8% YoY to Rs cr in Q4FY14. EBIT margins for the cigarette increased by 430bps YoY to 62.6%, driven largely by price increase taken during the quarter and product mix improvement. However, company reported 3% decline in cigarette volume as against 3% volume growth during the same quarter last year. A pick-up in 64mm cigarette consumption helped ITC to boost margins even when overall sales volumes declined. A nearly 40% duty hike on normal-sized cigarettes in the past two years along with a sharp drop in discretionary spending is gradually pushing up sales of the 64 mm cigarettes. Other FMCG revenues grew by 13.7% YoY to Rs cr. Revenue growth was aided by product mix/realization improvement, new product launches across most categories, enhanced scale, operating leverage, supply chain efiiciencies and strategic cost management initiatives. The segment reported a profit of Rs. 43.1cr in Q4FY14 as against Rs 11.9cr in Q4FY13, jump by 4x YoY. The segment has broken even operationally in FY14 amidst a general slowdown in the segment. Paperboard reported a decline in EBIT margin by 290bps YoY to 14.9% due to steep rise in input price particularly wood, coal and chemical costs. The company has taken a price and cost control actions to mitigate the impact of steep hike in input prices. The new paperboard machine, commissioned in March 2013 at the Bhadrachalam plant, has been fully ramped up. The revenue growth of 19.3% YoY was attributed to recent capacity additions. Agri business reported a sales growth of 8.1% YoY to Rs cr in Q4FY14 aided by improved realization and higher volumes. The segment reported an increased in EBIT margin by 40bps YoY to 7.3%. Hotel segment reported improvement in the EBIT margin by 580bps YoY to 18.7% in Q4FY14 and down by 100bps QoQ aided by sueprior perfromance by ITC Grand Chola. The segment reported a sales growth of 1.6% YoY to Rs cr in Q4FY14relatively weak pricing scenario. Annexure: Source: Company & Nirmal Bang Research 2 P a g e

3 Source: Company & Nirmal Bang Research SOTP Valuation: FY16E EV/EBIDTA (x) Rs. / share Cigarettes FMCG Others (EV/Sales) 4 62 Hotels Agri Business 7 8 Paper 8 19 Net (debt)/cash per share 17 Target Price 429 Source: Nirmal Bang Research 3 P a g e

4 Q4FY14 Standalone Result Analysis Rs. in crore Particulars Q4FY14 Q4FY13 YoY% Q3FY14 QoQ% Net Sales % % Other Operating Income % % Total Income % % Increase / Decrease in Stock Consumption of raw material % % Purchase of traded goods % % Employees Cost % % Other Expenditure % % Total Expenditure % % EBITDA % % Interest % % Other Income % % PBDT % % Depreciation % % Tax % % Reported Profit After Tax (PAT) % % EPS (Unit Curr.) Equity Face Value BPS BPS EBITDA(%) 35.0% 33.1% % -310 PBDT(%) 37.8% 35.9% % -470 PAT(%) 24.9% 23.6% % -280 Source: Company and Nirmal Bang Research 4 P a g e

5 Segment Analysis Rs. in crore Particulars Q4FY14 Q4FY13 YoY% Q3FY14 QoQ% FMCG - Cigarettes % % FMCG - Others % % Hotels % % Agri Business % % Paperboards, Paper & Packaging % % Total % % Profit / Loss before Interest & Tax FMCG - Cigarettes % % - Liability no longer written back FMCG - Cigarettes (Total) % % FMCG - Others % % Hotels % % Agri Business % % Paperboards, Paper & Packaging % % Total % % Less: Interest (Net) Liability no longer written back Interest Cost (Total) Other un-allocable income net of unallocable exp Profit before Tax Less: Tax Expense Profit After Tax % % EBIT Margin BPS BPS FMCG - Cigarettes 62.6% 58.3% % -180 FMCG - Cigarettes (Excluding liability) 62.6% 58.3% % -180 FMCG - Others 1.9% 0.6% % 140 Hotels 18.7% 12.9% % -100 Agri Business 7.3% 6.9% % -420 Paperboards, Paper & Packaging 14.9% 17.8% % -350 Source: Company and Nirmal Bang Research 5 P a g e

6 Consolidated Financials Profitability (Rs. In Cr) FY13 FY14 FY15E FY16E Balance Sheet (Rs. In Cr) FY13 FY14 FY15E FY16E Y/E - March Share Capital Revenues - Net Reserves & Surplus % change 19.6% 11.7% 19.5% 16.6% Net Worth EBITDA Minority Interest Interest Total Loans Other Income Net Deferred Tax Assets EBDT Total Liabilities Depreciation Net Fixed Assets Extraordinary/Exceptional Investments PBT Goodwill in Consolidation Tax Other Assets PAT Inventories Share of Profit & loss Sundry Debtors Minority Interest in Income Cash & Bank Adj PAT Loans & Advances Shares o/s ( No. in Cr.)* C A L&A EPS CL & P Adj EPS* Working Capital Cash EPS Total Assets DPS (Rs.) Cash Flow (Rs. In Cr) FY13 FY14E FY15E FY16E Quarterly (Rs. In Cr) June.13 Sept.13 Dec.13 Mar.14 Operating Net Revenue including OI Profit Before Tax EBITDA Direct Taxes paid Interest Depreciation EBDT Change in WC Dep Interest Expenses Other Income Other Income PBT CF from Operation Tax Investment PAT from ordinary activities Capex Minority Interest Other Investment PAT Goodwill on consolidation EPS (Rs.) Interest Received Operational Ratio FY13 FY14 FY15E FY16E Total Investment EBITDA margin (%) 34.7% 36.4% 37.3% 37.3% Free Cash Flow Adj.PAT margin (%) 24.3% 25.4% 26.0% 25.9% Financing Adj.PAT Growth (%) 21.6% 16.9% 22.2% 16.1% Equity raised/(repaid) Price Earnings (x) Inc/Dec in Reserves Book Value (Rs.) Debt raised/(repaid) ROCE (%) 52.3% 51.5% 53.3% 52.6% Dividend (incl. tax) paid RONW (%) 35.7% 35.3% 36.6% 36.1% Deferred Revenue Exp Debt Equity Ratio Interest Expenses Price / Book Value (x) Cash Flow from Financing Activities EV / Sales Net Cash Flow EV / EBIDTA Beginning Cash Flow Cash as reported in Balance Sheet Source: Company and Nirmal Bang Research 6 P a g e

7 Disclaimer: This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities PVT LTD). The information, analysis and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. Nirmal Bang Research (Division of Nirmal Bang Securities PVT LTD) B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park Lower Parel(W), Mumbai Board No. : /8001 Fax. : P a g e