Source: Company Data; PL Research

Transcription

1 Risk reward favourable; Upgrade to Accumulate January 22, 2016 Amnish Aggarwal Gaurav Jogani Rating Accumulate Price Rs309 Target Price Rs324 Implied Upside 4.9% Sensex 24,436 Nifty 7,422 (Prices as on January 22, 2016) Trading data Market Cap. (Rs bn) 2,439.7 Shares o/s (m) 7, M Avg. Daily value (Rs m) Major shareholders Promoters 0.00% Foreign 20.71% Domestic Inst % Public & Other 44.19% Stock Performance (%) 1M 6M 12M Absolute (3.6) (1.8) (11.9) Relative How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: ITC.BO, BB: ITC IN) (Rs) Jan 15 Mar 15 May 15 Source: Bloomberg Jul 15 Sep 15 Nov 15 Jan 16 We are upgrading ITC from Reduce to Accumulate given better than expected recovery in cigarette volumes despite deterioration in sales mix. Q3FY16 results were in line; however, cigarette volume decline of ~4% was better than our and market expectations. 64mm segment has led the volume recovery for ITC and it now accounts for ~18% of volumes even as RSFT and Kings Segment continued to suffer. Although medium term outlook is a function of excise duty in the coming budget, 20% volume decline in the past three years has made the base favourable for future growth. Non cigarette businesses have mixed outlook, given headwinds in rural demand, tourist flow and competition in Hotels, Zero duty imports from ASEAN countries in paperboard and currency and demand issues in Agri Business. ITC has declined by 16% since our downgrade in Feb2015 and risk reward looks favourable, given that we are valuing cigarette business at 21xDec2017E, a steep discount to even mid cap consumer names. We upgrade the stock from Reduce to Accumulate. Steep increase in Excise and VAT (GST) are the key risks to our stock rating. Cigarettes volumes decline ~4%: Q3FY16 Cigarette sales increased by 5.7% and EBIT increased by 3.4%, even as margins declined 160bps. Volumes declined by 4% only (14% Q2) as 64mm filters grew at the expense of RSFT segment and now account for 18% of volumes. Excise duty in upcoming budget holds the key to sustained recovery in cigarette volumes. We are factoring in 4.5% decline in cigarette volumes in FY17 and 1.7% growth in FY18. We estimate 7.8% cigarette EBIT growth in FY17 and 11.2% in FY18. Non cigarette business EBIT up 4.9%: FMCG sales grew 7.1%; EBIT increased 7.7% to Rs188m despite pipeline correction and Chennai floods impacting profitability. Hotels reported an EBIT of Rs258m on 4.5% sales growth as 200bps higher occupancy levels came at the expense of ARR. Paperboard sales increased 5.1%, EBIT increased 12.7% sales mix and lower inputs enabled 130bps margin expansion. Agri sales declined by 7.3%; EBIT declined by 3.1% even as lower commodity exports improved sales mix and enabled 70bps margin expansion. Key financials (Y/e March) E 2017E 2018E Revenues (Rs m) 365, , , ,008 Growth (%) EBITDA (Rs m) 134, , , ,012 PAT (Rs m) 96,078 97, , ,059 EPS (Rs) Growth (%) Net DPS (Rs) Profitability & Valuation E 2017E 2018E EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) Source: Company Data; PL Research Q3FY16 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Exhibit 1: Q2FY16 Result Overview (Rs m); Adj. PAT up 0.7% on 4% decline in cigarette volumes, 310bps higher tax rate Y/e March Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%) Net Sales 91,767 89, , , ,146 (2.0) Gross profit 58,412 54, , , , Margins (%) Other Exp 22,360 20, ,253 63,942 59, EBITDA 36,052 34, , , , Margins (%) Depreciation 2,625 2, ,588 7,796 7, Interest (12.0) Other Income 6,779 5, ,992 13,921 11, PBT 40,045 38, , , , Tax 13,517 11, ,589 37,774 34, Rate (%) Adj. PAT 26,528 26, ,313 73,495 72, Reported PAT 26,528 26, Exhibit 2: Q3FY16 Sales mix: Share of FMCG slowly inching up Paper and packaging 12.7% Agri business 14.9% Cigarettes 44.0% Exhibit 3: Q3FY16: Cigarettes remain cash cow for ITC FMCG 0.5% Hotels 0.7% Agri business 6.6% Hotels 3.5% Cigarettes 85.2% Paper and packaging 6.9% FMCG 24.9% Net sales increased by just 2.6% to Rs91.7bn mainly due to higher than expected decline in Agri business and lower sales growth in Hotels. Gross margins have increased by 260bps (330bps in Q2) due to price increase in Cigarettes and mix improvement in Agri and paperboard businesses. EBITDA margin increase was restricted to 60bps YoY due to 160bps increase in Other expenditure and 20bps in Employee cost. EBITDA increased by 4.1% to Rs36.05bn. PBT increased by 5.4% to Rs40bn as Other income increased by 16.5% even as Interest cost increased by 92%. Adj. PAT increased by 0.7% to Rs26.5bn due to 310bps increase in tax rate to 33.8%. Tax rate increased due to 1) higher surcharge 2) change in capital exemption period for MF investments and 3) no tax rebate on CSR expenses. January 22,

3 Exhibit 4: Cigarette volumes decline 4%; FMCG sales up 7.1%; Agri and paperboard show margin improvement 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 Cigarette Volume gr % Sales (Rs m) 95,531 99, , ,512 95,830 97, , ,567 99,438 Cigarettes 41,161 40,788 42,011 42,509 41,419 42,107 41,496 43,172 43,799 FMCG 20,778 23,145 19,346 21,960 23,141 25,665 21,710 23,516 24,777 Hotels 3,154 3,205 2,487 2,616 3,303 3,464 2,878 2,900 3,453 Agri business 17,864 20,042 32,961 20,587 15,979 14,279 23,254 18,437 14,810 Paper and packaging 12,574 12,612 12,885 12,841 11,988 12,026 12,650 12,541 12,600 Sales growth (YoY) Cigarettes (1.2) FMCG Hotels (0.5) Agri business (10.6) (28.8) (29.4) (10.4) (7.3) Paper and packaging (4.7) (4.6) (1.8) (2.3) 5.1 EBIT (Rs m) Cigarettes 26,526 25,519 27,218 28,821 28,863 27,062 27,811 29,689 29,838 FMCG (156) (103) (80) (111) 188 Hotels (121) (96) (73) (55) 258 Agri business 2,054 1,455 2,025 2,983 2,388 1,644 2,339 2,939 2,314 Paper and packaging 2,317 1,884 2,749 2,421 2,139 1,906 2,544 2,093 2,410 EBIT growth (YoY) Cigarettes FMCG (10.7) 12.6 (48.9) 7.7 (63.6) Hotels (235.2) (209.9) (53.8) (29.8) (40.0) (42.2) (10.0) Agri business (1.4) (3.1) Paper and packaging (7.7) 1.1 (7.4) (13.6) 12.7 EBIT Margin (%) Cigarettes FMCG (0.8) (0.5) (0.4) (0.5) 0.8 Hotels (4.9) (3.7) (2.5) (1.9) 7.5 Agri business Paper and packaging January 22,

4 Cigarette volumes decline 4%, 64mm segment leads recovery Q3Y16 Cigarette sales increased by 5.7%; EBIT increased by 3.4% even as margins declined by 160bps. We note that Cigarette margins have declined for the first time after 22 successive quarters of expansion. Volumes declined by ~4% YoY although the decline was far lower than 14% in the previous quarter. Volume recovery has been led by the 64mm segment as the share of this in total volumes has increased from 14% last year to the current level of 18 19%. RSFT has bore the brunt of higher excise and VAT and consequent increase in prices. We note that there has been downtrading by consumers due to sharp increase in prices in the past three years. ITC has increased its market share in the 64mm segment to ~65%. We expect further recovery in volumes in Q4FY16 although upcoming budget and excise duty holds key to sustained recovery in cigarette volumes in FY17. We believe that upto 10% excise increase would be positive for ITC, while any excise increase beyond this would impact volumes and profitability. We are currently factoring in 4.5% decline in FY17 and 1.7% growth in FY18. We estimate 7.8% cigarette EBIT growth in FY17 and 11.2% in FY18. Exhibit 5: Volumes decline in Cigarette appears to have bottom out Exhibit 6: Cigarette margins down 160bps YoY (%) EBIT Margins (%) QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 January 22,

5 FMCG: Supply chain disruptions impact growth, Ghee marks entry into Dairy space FMCG sales grew by 7.1% to Rs24.7bn, while EBIT increased by 63.6% to Rs188m as EBIT margins expanded 30bps, sales growth was impacted by slowdown in rural demand and supply chain disruptions in the South due to floods in Chennai. Most categories witnessed Gross margin expansion due to improved product mix and benign input costs. Profitability continued to remain impacted due to increase in adspend expenses on instant noodles and gestation cost of new categories i.e Gums, Juices and Dairy. Delishus Gourmet Cookie Chocolate Chip made with Ghana Cocoa and Marie Light Rich taste were launched under the confectionary business. ITC marked its entry into the Dairy business with the Launch of Aashirvaad Svasti Pure Cow Ghee which is manufactured at its Munger facility in Bihar. The product has a premium pricing of Rs530/kg and has been launched in Karnataka. ITC has started recovering lost ground in Sunfeast Yippee noodles and the growth has sustained even after the Maggi launch. Sunfeast Yippee has considerably increased market share post Maggi fiasco (13% earlier). Personal product business sales growth was impacted by the deflationary pricing scenario owing to decline in raw material prices. ITC is in the process of building consumer goods manufacturing and logistics facilities across various parts of the country in order to cater to its increasing consumer franchise, in this respect over 20 projects are underway and in various stages of development from land acquisition/site development to construction of buildings and other infrastructure. Education and Stationery Products Business revenue was impacted as synchronization of trade pipeline was undertaken ahead of the season. Exhibit 7: FMCG sales impacted by Chennai floods, rural slowdown and pipeline correction 30,000 25,000 20,000 15,000 10,000 5, , ,145 (156) 19,346 (103) Sales 21, ,141 EBIT (RHS) ,665 21,710 23,516 (80) (111) , (100) (200) 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 January 22,

6 Agri sales decline 7.3%; margins expand on improved mix Agri business sales declined 7.3%, due to adverse currency movements in major competing countries limiting export opportunities for Wheat, Soya and Coffee and subdued demand for Indian leaf Tobacco. Leaf tobacco exports continue to suffer due to decline in global cigarette volumes. We believe that declining demand for cigarettes can impact long term outlook in this business as against high growth in the past few years. EBIT declined by 3.1% to Rs2.3bn even as margins expanded by 70bps to 15.6% on improved sales mix and lower prices of leaf tobacco in India. Exhibit 8: Agri business: EBIT margins up 70bps on improved sales mix 25.0 EBIT Margins (%) EBIT Growth (%) QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 Paperboard and Paper: Sales up 5.1%, margins up 130bps Paper business reported 5.1% sales growth after four consecutive quarters of decline in sales, EBIT grew by 12.7% as margins expanded by 130bps to 19.7% on benign input costs and improved product mix. Slowdown in FMCG and Cigarette industry along with zero duty imports from ASEAN countries continues to impact realisations and sales growth. ITC is increasing paperboard capacity from 0.6MT to 0.67MT in the coming 1.5 years. It is also adding India s first Bleached Chemical Thermo Mechanical Pulp mill at its Bhadrachalam unit to reduce costs and its dependence on imports. Input cost scenario and strong brands have enabled margin improvement, however ITC has passed on the input cost gains in B2B segments of business. Mix improvement will remain key driver to profitability in the near term. January 22,

7 Exhibit 9: Paperboard: Margins expand 130bps on benign input cost and mix improvement EBIT Margins (%) Sales growth % QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 Hotels: Sales up 4.5%, Chennai Floods flat ARR impacts margins Hotels business sales grew 4.5%; EBIT declined 10% to Rs258m. Q3FY16 sales growth was impacted by sluggish global and Indian scenario and Chennai floods. Occupancy levels improved 200bps to more than 70%; however increase in occupancy came at the expense of pricing. F&B remains at 45 50% of revenues. EBIT was impacted by gestation cost of the recently commissioned ITC Grand Bharat, Chennai floods and higher depreciation charges under Companies Act. We expect slow recovery only given high competition and pressure on ARR. Exhibit 10: Hotels: Falling ARR and gestation costs impacts profitability Sales EBIT EBIT Margins (%) (RHS) (Rs m) 4,000 3,500 3,000 2,500 2,000 1,500 1, (500) QFY14 3, QFY14 3, ,487 1QFY15 (121) 2, QFY15 (96) 8.7 3QFY15 3, QFY15 3, ,878 1QFY16 (73) 2,900 2QFY16 (55) 7.5 3QFY16 3, January 22,

8 Exhibit 11: Annual segmental data Y/e March FY13 FY14 FY15 FY16E FY17E FY18E Net Sales (Rs m) Cigarettes 139, , , , , ,571 FMCG 69,828 80,992 90,113 99, , ,121 Hotels 10,742 11,328 11,870 13,187 14,789 16,037 Agri Business 72,007 77,521 83,805 74,990 82,651 92,762 Paperboards & Paper 42,368 48,605 49,739 49,967 53,088 57,662 EBIT (Rs m) Cigarettes 83, , , , , ,099 FMCG (813) ,141 1,982 Hotels 1,377 1, ,055 1,812 2,566 Agri Business 7,313 8,348 9,040 8,399 8,926 9,926 Paperboards & Paper 9,640 8,925 9,215 8,994 10,087 11,532 EBIT Margin (%) Cigarettes FMCG (1.2) Hotels Agri Business Paperboards & Paper EBIT Growth (%) Cigarettes FMCG (58.4) (126.9) Hotels (50.7) 1.5 (64.9) Agri Business (7.1) Paperboards & Paper 2.9 (7.4) 3.3 (2.4) Non Cigarette Businesses Net Sales 194, , , , , ,583 Growth % EBIT 17,516 18,888 19,086 18,946 21,966 26,006 EBIT Growth (%) (0.7) EBIT Margin (%) January 22,

9 Income Statement (Rs m) Y/e March E 2017E 2018E Net Revenue 365, , , ,008 Raw Material Expenses 146, , , ,470 Gross Profit 218, , , ,537 Employee Cost 17,800 18,991 20,956 22,593 Other Expenses 65,819 62,315 69,270 76,933 EBITDA 134, , , ,012 Depr. & Amortization 9,617 10,528 11,474 12,464 Net Interest (14,857) (17,102) (20,228) (24,000) Other Income 15,431 17,607 20,732 24,504 Profit before Tax 139, , , ,548 Total Tax 43,898 50,422 54,078 61,488 Profit after Tax 96,078 97, , ,059 Ex Od items / Min. Int. Adj. PAT 96,078 97, , ,059 Avg. Shares O/S (m) 8, , , ,255.5 EPS (Rs.) Cash Flow Abstract (Rs m) Y/e March E 2017E 2018E C/F from Operations 117, , , ,242 C/F from Investing (69,453) (55,502) 64,297 73,553 C/F from Financing (48,870) (57,566) (183,879) (207,644) Inc. / Dec. in Cash (636) Opening Cash 2,347 1,712 2,353 2,358 Closing Cash 1,711 1,982 2,363 2,509 FCFF 84,581 93,822 99, ,583 FCFE 84,445 93,832 99, ,583 Key Financial Metrics Y/e March E 2017E 2018E Growth Revenue (%) EBITDA (%) PAT (%) EPS (%) Profitability EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity (0.4) (0.5) (0.6) (0.6) Net Wrkng Cap. (days) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality Eff. Tax Rate Other Inc / PBT Eff. Depr. Rate (%) FCFE / PAT Balance Sheet Abstract (Rs m) Y/e March E 2017E 2018E Shareholder's Funds 307, , , ,983 Total Debt Other Liabilities 16,316 19,695 23,372 27,568 Total Liabilities 324, , , ,092 Net Fixed Assets 162, , , ,319 Goodwill Investments 24,416 24,416 24,416 24,416 Net Current Assets 136, , , ,356 Cash & Equivalents 135, , , ,867 Other Current Assets 119, , , ,744 Current Liabilities 117, , , ,255 Other Assets Total Assets 324, , , ,092 Quarterly Financials (Rs m) Y/e March Q2FY15 Q4FY15 Q1FY16 Q2FY16 Net Revenue 90,237 92,928 85,877 89,042 EBITDA 34,887 32,431 33,859 35,601 % of revenue Depr. & Amortization 2,432 2,496 2,582 2,588 Net Interest Other Income 3,562 3,704 3,150 3,992 Profit before Tax 35,833 33,484 34,322 36,902 Total Tax 11,581 9,872 11,668 12,589 Profit after Tax 24,252 23,612 22,654 24,313 Adj. PAT 24,252 23,612 22,654 24,313 Key Operating Metrics Y/e March E 2017E 2018E Cigarette Volume growth % (8.3) (10.5) (4.5) 1.7 Cigarette EBIT growth % FMCG EBIT (rsm) , , January 22,

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