ITC. Annual Report Analysis. Accumulate. Growing amidst challenges

Transcription

1 Annual Report Analysis ITC Accumulate Growing amidst challenges Upscaling Personal and Home care segment ITC extended the newly acquired Charmis brand to a range of skincare products that would compete with HUL s Pond s and Nivea, and help scale up its presence in the high-margin personal-care business. It has also acquired floor cleaning brand Nimyle from Kolkata-based Arpita Agro Products. Amidst competitive pressure, it will take ~3-4 years with strong distribution for ITC to become a significant player in the categories. Venture into value-added dairy products ITC has entered the liquid milk segment with pouches under Aashirvaad Svasti brand competing with Amul, Mother Dairy etc. It is also planning to launch a range of ready-to-drink milkbased beverages and frozen desserts from its new plant in Punjab to accelerate its dairy business. This is part of ITC s efforts to generate about ` 65bn from packaged foods by 23. With e choupal and strong farmer connect, ITC can acquire good share of the business. Legal cigarette industry reeling under pressure The legitimate cigarette industry in India declined steadily since at a CAGR of 4.8% p.a., however, illegal cigarette volumes have grown at about 5% p.a. during the same period, making India the 4th largest illegal cigarette market in the world. This results in ` 13bn revenue loss to the government each year. While legal cigarettes in India contribute 87% of tax revenue, it constitutes only 11% of tobacco consumption. India is studying the Kenyan model of tracking tobacco products to curb illicit trade that leads to loss of tax revenue. The mechanism includes tax stamps with a QR code that can be scanned through a smartphone to check the authenticity and trace goods throughout the supply chain. This will eventually help legal cigarette business to grow. View Despite a sharp slowdown in the economy, steep increase in tax incidence on cigarettes, subdued demand conditions in the FMCG industry, shortage of tobacco crop in Andhra Pradesh and lack of trading opportunities in the Agri Business, ITC witnessed satisfactory performance in FY18. While net sales grew by just over 1%, bottom-line grew by 6% during the year. Cigarette volume growth is expected to amplify on the favorable base of past one year (~18% volume decline in past three years). Packaged food business, which accounts for 76% of ITC s Non-Cigarette FMCG business is expected to drive growth. Moreover, normal monsoon forecast and increasing disposable income, we anticipate consumer shift from bidi to cigarette as well as to branded FMCG products which is likely to improve company s profitability. Maintain Accumulate. FINANCIALS (` Mn) Particulars FY16 FY17 FY18 FY19E FY2E Net Sales 365,827 4,887 46,275 44, ,18 Growth (%) EBITDA 137, ,78 155,41 172,62 193,17 OPM (%) Net Profit (after MI) 93,283 12,9 18,14 12,11 134,489 Growth (%) (2.9) EPS (`) PER(x) ROANW (%) ROACE (%) July 5, 218 CMP ` 272 Target / Upside ` 31/14% BSE Sensex 35,575 NSE Nifty 1,75 Scrip Details Equity / FV ` 12,24mn/` 1/- Market Cap ` 3,319bn USD 48bn 52-week High/Low ` 344/25 Avg. Volume (no) 1,4,693 NSE Symbol Bloomberg Code Shareholding Pattern Mar 18 (%) ITC ITC IN Promoters. MF/Banks/FIs 37. FIIs 48.4 Public / Others ITC Relative to Sensex Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 ITC BSE Sensex Sr. Analyst: Sachin Bobade Tel: sachinb@dolatcapital.com Associate: Nikhat Koor Tel: nikhatk@dolatcapital.com

2 Financial Analysis Profit and Loss Statement Analysis Revenue- On a comparable basis, Gross Sales Value (net of rebates/discounts) for the year stood at ` 67bn, representing a growth of 4.5% mainly driven by the Branded Packaged Foods, Personal Care Products and the Education and Stationery Products Businesses. Net revenue (excl excise duty) increased 1.3% YoY to ` 46bn. EBITDA increased by 6.6% YoY to ` 155bn. EBITDA margin expanded 188bps to 38.3%. Exceptional items during the year represent provisions for earlier years of ` 4,129mn in respect of Tamil Nadu entry tax that have been written back Including Exceptional items, Profit Before Tax at ` 168bn and PAT at ` 112bn exhibited growth of 8.7% and 1.% respectively during the year. Adjusted PAT rose 6% YoY to ` 18bn. EPS improved to ` 9.2 in FY18 from ` 8.4 in FY17. Balance Sheet Analysis During the year, the Company issued 5,69,11,84 equity shares of ` 1. each amounting to ` 56.9 mn (217 - ` 73.5mn) towards its equity-settled employee stock options.the securities premium stood at ` 74.4bn as at 31st March, 218. (217 : ` 64.3bn). Consequently, the Issued and Subscribed Share Capital of the company, as on 31st March 218, stands increased to `12,24mn divided into `12,24mn Ordinary Shares of ` 1/- each. Inventory declined by 8.% YoY to ` 72.3bn in FY18. Inventory days declined from 72 days in FY17 to 66 days in FY18. Receivable days remained stable at 21 while trade payable days increased from 23 days in FY17 to 3 days in FY18. As a result, working capital turnover improved to 4.1x in FY18 from 3.9x in FY17. During FY18, ROE and ROCE stood at 22.3% (23.5% in FY17) and 31.% respectively (32.9% in FY17). ROIC stood at 32.6% compared to 34.9% in FY17. We believe that the company would continue to report strong margins and PAT growth which would increase return ratios (ROCE and ROIC) 3%+ going ahead Capex stood at ` 27.3bn in FY18 compared to ` 3.bn in FY17. Cigarette, Other FMCG and Agri business registered -64%, -28% and -42% decline in capex respectively. Significant increase in capex reported for Paperboards and Packaging (+62%) and Hotels (+53%). Cash flow from Operations stood at ` 123.3bn in FY18, an increase of 3.2% YoY. Improvement in Cash flow from operations and lower capex led to 7.4% increase in FCF to ` 96bn in FY18. Going forward, we believe that cumulative FCF of Rs 293bn during FY18-2 would be sufficient to fund WC and capex requirement. BOD recommend an Ordinary Dividend of ` 5.15 per share of face value `1 each for FY18 (previous year Ordinary Dividend of ` 4.75 per share) for the year ended 31st March 218. The total equity dividend to be paid is ` 63bn (excl dividend tax) for FY18. July 5, 218 2

3 Segmental Performance Segmental Performance Particulars (` mn) FY18 FY17 YoY (%) Comments Cigarettes Revenue 228,94 34,2 (32.7) Tax incidence on cigarettes rose sharply by 13% with an even steeper increase of 19% for the king-size filter EBIT 133,48 125, segment under the GST regime. Coupled with the increase in Excise Duty rates announced in the Union Budget 217, this resulted in EBIT Margin % an incremental tax burden of over 2% on ITC s Cigarette Business. FMCG Others Revenue 113,286 15, Comparable Revenue growth at 11.3% driven by Foods, Personal Care and Education business EBIT 1, Margin expansion due to better mix and cost management initiiatives EBIT Margin % Hotels Revenue 14,175 13, Growth driven by higher room rates and robust F&B revenue partially impacted by highway liquor ban and excess room inventory EBIT 1,398 1, Improvement in room rates and operating leverage led to better margins EBIT Margin % Agri Business Revenue 8,677 82,646 (2.4) Limited trading opportunities, increase in leaf prices, lower export incentives, shortage & adverse quality of EBIT 8,486 9,58 (6.3) Andhra tobacco crop EBIT Margin % Paper & Packaging Revenue 52,496 53,629 (2.1) Business impacted due to sluggish demand conditions in FMCG, liquor and legal Cigarette industry, cheap EBIT 1,422 9,658 imports from China and surplus capacity 7.9 Margin expansion driven by benign wood cost, structural cost saving initiatives and improved mix EBIT Margin % Total Revenue 489, ,83 (17.7) EBIT 155, , EBIT Margin % July 5, 218 3

4 Other Segmental Highlights FMCG- Cigarettes Cigarette taxes in India are 14x higher than USA, 9x higher than Japan, 7x higher than China. Cigarette taxes remain, effectively, ~ 5x higher than on other tobacco products. post implementation of GST. Duty-paid cigarettes account for only about 11% of tobacco consumption in the country as compared to the global average of more than 9%. Some of the key interventions during the year include the launch of innovative variants viz., Classic Double Burst, Gold Flake Mint Switch, Flake Mint Switch, Bristol Magnum, Navy Cut Century and a new brand, Wave. During the year, the Electronic Vaping Devices portfolio was augmented with the launch of EON Myx, a disposable variant which is offered in adult flavours like coffee in addition to menthol and full flavour. FMCG Others Packaged foods division now accounts for 76% of the total sales of non-cigarette FMCG business. The packaged food business is projected to be the majority contributor (~6-65%) to ITC s goal to achieve Rs 1tn sales from the FMCG- Non cigarette businesses by 23. In FY18, apart from new launches in noodles, biscuit, juice and soap categories, ITC forayed into packaged fruits and vegetables, blended spices and frozen prawns, and is betting on the dairy business as the next big growth driver. FMCG-Non-cigarette accounted for 23% of total turnover in FY18 (18% in FY17) while Cigarette contribution decreased from 57% in FY17 to 47% in FY18. ITC is the market leader in packaged atta, premium cream biscuits, and the bridges segment in snacks. It is the second largest in instant noodles and the third in packaged juice. Aashirvaad is the largest non-cigarette food brand at more than ` 4bn, followed by Sunfeast at more than `35bn, and Bingo at more than ` 2bn. Dark Fantasy Choco Fills sustained its market leadership position in the Super- Premium Creams segment across the country. Engage deodorants, Vivel / Fiama soaps & shower gels and Savlon handwash fueled strong growth in the Personal Care Products Business. ITC launched Engage ON variants in deodorants; and moisturising skin creams under Charmis brand. Other notable launches over FY18 included Yippee Mood Masala Noodles, Farmlite Protein Power biscuit, Mom s Magic Fruit & Milk variant, B Natural Juice Bael & Phalsa variants During the year, ITC commissioned two world-class Integrated Consumer Goods Manufacturing and Logistics Units (ICMLs) at Panchla, West Bengal and Kapurthala, Punjab. Capacity utilisation was progressively scaled up at the Uluberia, Mysuru and Guwahati units that commenced operations in H2FY17. Guwahati facility has achieved 9% utilization levels within a year, strengthening supply chain and efficient servicing of North East markets. Currently, in order to scale up capacity for FMCG, over 15 projects are underway and in various stages of development. ITC s robust supply chain and distribution network covers > 6 mn retail outlets directly and indirectly across various trade channels thereby enhancing reach and availability of the company s large and diverse product portfolio. July 5, 218 4

5 Agri business Domestic food grain production for 217 crop year stood at 275 mn tonnes, up 9% YoY. Production of wheat grew by 6.5% to 98.5 mn tonnes, rice production increased by 5% to 19.7 mn tonnes and coarse cereals production increased by 13% to 43.7 mn tonnes Indian tobacco crop output was lower at 212mn Kg on account of Tobacco Board s decision to reduce the authorized crop size and unprecedented drought in Andhra Pradesh in 216. Crop output in AP reduced to 16mn kgs the lowest level in a decade. Global tobacco demand remained subdued. FY18 marked fourth successive year of decline in Indian tobacco exports to 178 million kgs. a ten-year low. During the year, ITC strengthened its milk procurement network for Aashirvaad Svasti ghee with significant increase in daily milk collection. Spices Business continued to expand in Food Safe Markets viz. US, EU and Japan and entered new markets such as Australia, Germany, Turkey and Ukraine. During FY18, the company launched ITC Master Chef range of frozen prawns, branded packaged potatoes and apples under the Farmland brand and ITC Master Chef - Smart Onions, a dehydrated onion product. Hotels In FY18, ITC commissioned the 13-room WelcomHotel Coimbatore and expanded presence in business and leisure destinations adding managed properties in Chennai, Bengaluru, Pahalgam and Mussoorie. ITC was declared the successful bidder for a 25-room luxury beach resort located in South Goa operating under the name Park Hyatt Goa Resort and Spa, following an auction held by IFCI Limited in February 215 in terms of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 22. The WelcomHeritage brand remains the country s most successful and largest chain of heritage hotels with 34 operational hotels. The Fortune brand (45 hotels) sustained its pre-eminent position in the Mid-market to Upscale segment. Paperboards, Paper and Packaging Over the next five years, the domestic industry is projected to grow at CAGR 6-7% to reach 2 million tonnes by 222 with the Paperboard (48% of the market) and Writing & Printing paper (3% of the market) segments estimated to grow at ~CAGR 7.5% and 6.% respectively. Within Paperboards, demand for Value-Added Paperboards (VAP) in India is projected to grow at a healthy rate ~ 1.5% CAGR driven by growth in demand from the FMCG, Pharma, Publishing, and Food & Beverage industries. During the year, import of paper and paperboard from China, ASEAN and South Korea grew by 57% while overall paper imports increased by 38%. July 5, 218 5

6 Key Managerial Personnel Mr. Rajendra Kumar Singhi was appointed by the Board as the Company Secretary with effect from 4th February 218 succeeding Mr. Biswa Behari Chatterjee. The BOD re-designated Mr. Sanjiv Puri as Managing Director of the Company with effect from the 16 th May 218. The Board approved Mr. Puri as a Director, not liable to retire by rotation, and also as Managing Director of the Company for a period of five years with effect from 22nd July, 219. The BOD approved re-appointment of Mr. Y.C Deveshwar as Non-Executive Director and Chairman of the Company from Feb 22 to Feb 222 so that he can continue to mentor the senior management given the increasing size and complexity of the organization. Net Sales Growth FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Net sales (` bn) - LHS Growth (%) - RHS (5) Agri Products & Retail 16% Breakup of Sales* (FY18) New FMCG 23% Hotels 3% Paper and Packaging 11% (*Gross sales) Cigarettes & Tobacco 47% EBITDA and EBITDA Margin trend Net Profit Growth FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 EBITDA (` bn) - LHS Margin (%) - RHS (5) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Adj. Net Profit (` bn) - LHS Growth (%) - RHS July 5, 218 6

7 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY Trend in Net Sales & YoY Growth (%) Trend in Cigarette Volume Growth (%) (6.) (5.)(3.) -1 (9.) (5) -13 (1) -16 (13.) (14.5) -19 (16.) Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Net Sales (` bn)- LHS Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Growth (%) - RHS Trend in EBITDA & YoY EBITDA growth (%) Trend in Net Profit & YoY Net Profit Growth (%) Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 EBITDA (` bn) - LHS Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 YoY Growth (%) - RHS Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Net Profit (` bn)- LHS Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Growth (%) - RHS July 5, 218 7

8 Income Statement (` mn) Particulars Mar17 Mar18 Mar19E Mar2E Net Sales 396,419 42,547 44, ,18 Other operating income 4,468 3,729 Other income 19,859 21,298 21,989 24,63 Total Income 42, , ,863 56,711 Total Expenditure 255,16 25, , ,939 Raw Material 159, ,9 169, ,131 Employee Expenses 24,443 24,875 26,19 26,946 Advertising exp 7,924 8,862 13,667 14,945 Selling & Adm. Expenses 48,416 44,25 44,248 46,57 Manufacturing exp 14,56 15,23 14,691 14,86 EBIDTA (Excl. OI) 145,78 155,41 172,62 193,17 EBIDTA (Incl. OI) 165,64 176,78 194,61 217,772 Interest EBDT 165,41 175, ,7 216,817 Depreciation 1,38 11,454 11,686 12,846 PBT & EO Items 155,3 164, ,13 23,97 Extra Ordinary Exps/(Inc) (4,129) Profit Before Tax 155,3 168, ,13 23,97 Tax 53,21 56,285 62,2 69,482 Net Profit 12,9 18,14 12,11 134,489 Balance Sheet (` mn) Particulars Mar17 Mar18 Mar19E Mar2E Sources of Funds Equity Capital 12,147 12,24 12,24 12,24 Share Premium 64,322 74,444 74,444 74,444 Other Reserves 376,94 427,352 47, ,638 Net Worth 453,41 514, 556,94 614,286 Unsecured Loans ,111 4,111 Loan Funds ,111 4,111 Deferred Tax Liability 18,717 19,179 21,2 21,2 Total Capital Employed 472, ,29 582, ,597 Applications of Funds Gross Block 168, ,49 21,49 221,49 Less: Accumulated Dep. 2,154 3,29 41,977 54,823 Net Block 148,82 151,2 159, ,667 Capital Work in Progress 35,37 5,168 5,168 5,168 Investments 185, , ,636 27,389 Current Assets, Loans & Advances Inventories 78,64 72,372 81,78 89,225 Sundry Debtors 22,75 23,57 25,814 28,229 Cash and Bank Balance 27,473 25,948 49,684 92,986 Loans and Advances 36,387 38,27 4,117 42,123 Other Current Assets 7,559 6,29 6,83 7,513 sub total 172, ,35 24,224 26,75 Less: Current Liabilities & Provisions Creditors 25,512 33,822 28,415 3,967 Other Liabilities 42,53 32,921 69,3 75,124 Provisions 1,732 1,612 1,612 1,612 sub total 69,775 68,355 99,327 17,73 Net Current Assets 12,36 97,95 14, ,373 Total Assets 472, ,29 582, ,597 E Estimates Cash Flow (` mn) Particulars Mar17 Mar18 Mar19E Mar2E Profit before tax 155,3 164, ,13 23,97 Depreciation & w.o. 1,38 11,454 11,686 12,846 Net Interest Exp Direct taxes paid (53,21) (56,285) (62,2) (69,482) Change in Working Capital 6,836 2,885 16,789 (4,173) (A) CF from Opt. Activities 119, ,38 149, ,117 Capex (3,81) (27,332) (2,) (2,) Free Cash Flow 89,374 95, , ,117 Inc./ (Dec.) in Investments (52,68) (48,119) (33,664) (2,753) (B) CF from Invt. Activities (82,689) (75,451) (53,664) (22,753) Issue of Equity/ Preference 11,564 1,179 Inc./(Dec.) in Debt (165) (147) 4, Interest exp net (23) (867) (91) (955) Dividend Paid (Incl. Tax) (78,136) (68,83) (77,17) (77,17) Other 1,281 1,256 2,21 (C) CF from Financing (65,685) (49,382) (71,996) (78,62) Net Change in Cash (28,919) (1,525) 23,736 43,33 Opening Cash balances 56,392 27,473 25,948 49,684 Closing Cash balances 27,473 25,948 49,684 92,986 Important Ratios Particulars Mar17 Mar18 Mar19E Mar2E (A) Measures of Performance (%) Contribution Margin EBIDTA Marg. (excl. OI) EBDT Margin Tax/PBT Net Profit Margin (B) As Percentage of Net Sales Raw Material Employee Expenses Advertising exp Selling & Adm.Expenses Manufacturing exp (C) Measures of Financial Status Interest Coverage (x) Debtors Period (days) Closing stock (days) Inventory Turn. Ratio (x) Fixed Assets Turn. (x) WC Turnover (x) Non-Cash WC (` Mn) 74,887 72,2 55,214 59,386 (D) Measures of Investment EPS (`.) CEPS (`.) DPS (`.) Dividend Payout (%) Book Value (`.) RoANW (%) RoACE (%) RoAIC (%) (E) Valuation Ratios CMP (`.) P/E (x) Market Cap. (`. Mn.) 3,34,93 3,319,57 3,319,57 3,319,57 MCap/ Sales (x) EV (`. Mn.) 3,212,165 3,192,735 3,174,962 3,1,694 EV/Sales (x) EV/EBDITA (x) P/BV (x) FCFE Yield (%) Dividend Yield (%) E Estimates July 5, 218 8

9 DART RATING MATRIX Total Return Expectation (12 Months) Buy > 2% Accumulate 1 to 2% Reduce to 1% Sell < % Rating and Target Price History Date Rating TP (`) Price (`)* Oct'16 Buy Jan'17 Accumulate May 18 Accumulate * As on Recommended Dated Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 ITC Target DART Team Purvag Shah Managing Director purvag@dolatcapital.com Amit Khurana, CFA Head of Equities amit@dolatcapital.com CONTACT DETAILS Equity Sales Designation Direct Lines Dinesh Bajaj VP - Equity Sales dineshb@dolatcapital.com Kartik Sadagopan VP - Equity Sales kartiks@dolatcapital.com Kapil Yadav VP - Equity Sales kapil@dolatcapital.com Derivatives Strategist Designation Bhavin Mehta VP - Derivatives Strategist bhavinm@dolatcapital.com Equity Trading Designation P. Sridhar VP and Head of Sales Trading sridhar@dolatcapital.com Chandrakant Ware AVP - Equity Sales Trading chandrakant@dolatcapital.com Derivatives Trading Designation Shirish Thakkar AVP - Derivatives shirisht@dolatcapital.com Hardik Mehta Sales Trader hardikm@dolatcapital.com Dolat Capital Market Private Limited. 2, Rajabahadur Mansion, 1st Floor, Ambalal Doshi Marg, Fort, Mumbai - 4 1

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