Cigarette sales disappoint; Non-cigarette FMCG outperforms Reco: Hold CMP: Rs269 Company details Price target: Market cap: 52-week high/low: NSE volume: (No of shares) Rs325 Rs327,740 cr Rs367/222 129.6 lakh BSE code: 500875 NSE code: Sharekhan code: Free float: (No of shares) Shareholding pattern Price chart 360 340 320 300 280 260 240 220 200 Non-promoter corporate 34% Oct-16 Price performance Public and others 11% Feb-17 Foreign 19% Jun-17 Institutions 36% 1218.4 cr Oct-17 (%) 1m 3m 6m 12m Absolute 2.3-8.6-6.4 14.1 Relative to Sensex -2.5-10.9-15.7-5.3 Key points Revenue and PAT grew in low single digits: For Q2FY2018, reported 3.9% and 6.8% growth in its gross revenue and net revenue (on comparable basis), respectively, driven by double-digit revenue growth in non-cigarette FMCG and paperboard.. Gross margin declined by 423BPS to 57.8% and OPM declined by 111BPS YoY to 36.5%. Operating profit grew by 3.6% YoY to Rs.3,761.5 crore. Higher other income and lower incidence of tax led to 5.6% YoY growth in reported PAT to Rs.2,639.8 crore (ahead of our expectation of Rs.2,537.4 crore). Cigarette sales volume declined by 5-6%; Noncigarette FMCG outperforms: Revenue of the cigarette business grew by 1-2% on comparable basis, as cigarette sales volume declined by 5-6% on account of a substantial increase in tax rate under the GST regime. PBIT grew by 2.3% YoY on account of price hikes undertaken prior/ post GST implementation. Non-cigarette FMCG delivered a strong performance in the tough market environment, with 10% revenue growth and PBIT standing at Rs.20.3 crore. Revenue of the agri business grew by 5% on account of limited trading opportunities in agri commodities and shortage of leaf tobacco due to drought in Andhra Pradesh. PPP business PBIT registered robust 18% growth, driven by richer product mix and structural cost-saving initiatives. Outlook: Cigarette sales to remain under pressure: We expect cigarette sales volumes to remain under pressure in the coming quarters, as significant price hike would take some time to get absorbed in the market. We expect cigarette sales volumes to be lower by 3-4% in FY2018. On the other hand, non-cigarette FMCG business is expected to post much better performance in H2 with expected recovery in general trade and rural demand coming back on track. PPP business would continue to post better profitability on account of better revenue mix and benign input cost. Maintain Hold: We have revised downwards our earnings estimates for FY2018 by 4% to factor in low single-digit decline in cigarette sales volumes and lower growth in the agri business. We have broadly maintained our earnings estimates for FY2019. The stock is currently trading at 24x its FY2019E earnings. In view of sustained pressure on cigarette business, we maintain our Hold recommendation on the stock with unchanged price target of Rs.325. October 27, 2017 4
Valuation (standalone) Particulars FY2015 FY2016 FY2017 FY2018E FY2019E Revenues 36,507.4 51,944.6 55,448.5 64,374.6 74,619.4 Net profit 9,607.7 9,328.4 10,200.9 11,471.4 13,762.4 EPS (Rs.) 7.9 7.7 8.4 9.4 11.3 yoy chg (%) 9.4-2.9 9.4 12.5 20.0 PE(x) 34.1 35.1 32.1 28.5 23.8 P/BV (X) 10.7 7.9 7.2 6.9 6.4 EV/EBITDA (x) 23.7 22.9 21.2 19.1 15.7 RoCE (%) 41.7 33.5 29.8 31.5 35.7 RoNW (%) 33.7 25.8 23.5 24.8 27.8 Results (standalone) Particulars Q2FY18 Q2FY17 YoY % Q1FY18 QoQ % Gross revenues 16391.6 15769.9 3.9 13800.4-25.3 GST/Excise and other taxes 6165.2 6234.4-1.1 - Net Sales 10314.1 9660.7 6.8 13800.4 0.4 Total expenditure 6552.6 6030.7 8.7 10054.0-34.8 Operating Profit 3761.5 3630.0 3.6 3746.4 0.4 Other income 494.2 475.4 4.0 476.8 3.7 Interest 29.0 10.7 170.6 10.4 179.5 Depreciation 282.4 268.4 5.2 268.2 5.3 Profit before tax 3944.3 3826.2 3.1 3944.6 0.0 Tax 1304.5 1326.2-1.6 1384.1-5.8 Reported PAT 2639.8 2500.0 5.6 2717.3-2.9 EPS (Rs.) 2639.8 2500.0 5.6 2717.3-2.9 BPS BPS GPM (%) 57.8 62.0-423 44.3 - OPM (%) 36.5 37.6-111 27.1 - Segmental revenues Particulars Q2FY18 Q2FY17 YoY % Q1FY18 QoQ % FMCG - cigarettes 4,554.2 8,528.5-46.6 8,774.2-48.1 FMCG - others 2,804.1 2,671.7 5.0 2,600.9 7.8 Hotels 300.2 297.3 1.0 304.9-1.5 Agri 1,968.0 1,880.1 4.7 2,760.2-28.7 Paperboard, Paper and Packaging 1,309.4 1,331.4-1.7 1,359.8-3.7 Total 10,935.9 14,708.9-25.7 15,800.0-30.8 Less: inter segment sales 1,259.7 1,217.6 3.5 2,078.1-39.4 Net Sales 9,676.2 13,491.4-28.3 13,721.9-29.5 * Q2FY2018 is the first quarter under GST implementation # Under the GST regime, revenue is calculated net of GST and, hence, is not comparable on YoY basis Segmental PBIT Business Q2FY18 Q2FY17 YoY % FMCG - cigarettes 3291.7 3216.9 2.3 FMCG - others 20.5-3.3-728.5 Hotels 4.2 0.7 552.3 Agri 256.2 297.0-13.7 Paperboard, Paper and Packaging 274.2 232.0 18.2 Total 3846.8 3743.2 2.8 October 27, 2017 5
Cigarette business: Sales volume declined due to higher tax As anticipated, cigarette business sales volumes took a blow on account of significant price hike undertaken post the substantial tax hike under the GST regime. Sales volumes of the cigarette business declined by 5-6% as per our calculations. Revenue on comparable basis grew by 1-2% during the quarter. PBIT of the cigarette business grew by just 2% to Rs.3,291.7 crore during the quarter. We expect cigarette sales volumes to remain under pressure in the coming quarters as significant price hike would take some time to get absorbed in the market. We expect cigarette sales volumes to be lower by 3-4% in FY2018. If the government continues to substantially hike taxes on cigarettes, it will continue to put pressure on s cigarette business in the coming years. Non-cigarette FMCG business - Revenue grows at single-digit rate In Q2FY2018, non-cigarette FMCG business of grew by 5% YoY to Rs.2,804.1 crore. However, on a comparable basis, growth came in at 10% despite muted demand environment and disruption due to GST transition. Growth was driven by strong performance of the branded packaged foods and personal care businesses, partly offset by the impact of ongoing restructuring of retail and trade footprint in the lifestyle retailing business. While off take in the retail channel has normalised progressively through the quarter, the wholesale channel is yet to fully recover. The branded packaged food segment posted healthy revenue growth, led by atta, snacks and noodles. Growth of this segment was in mid to high teens and was better than the overall growth of non-cigarette FMCG business. In the staples, snacks and meals business, Aashirvaad Atta continued to perform well, consolidating its leadership position across markets. The finger snacks segment recorded robust growth, driven by Bingo! range of snack foods. During the quarter, several innovative products were introduced to suit regional tastes and preferences. In the instant noodles category, YiPPee! continued to perform well. The recently launched YiPPee! Mood Masala variant continued to garner increasing consumer franchise across target markets. In the dairy and beverages business, B Natural juices continued to register strong growth, leveraging a portfolio of differentiated products, including a wide range of Not from Concentrate variants that are made directly from fruit pulp, thereby providing consumers a more nutritive and natural tasting experience. In dairy, Aashirvaad Svasti ghee was extended to the Delhi and NCR markets during the quarter. The personal care products business continues to focus on product mix enrichment and augmenting its product portfolio. The Engage On range of pocket perfumes recorded robust growth on account of its unique value proposition, combining convenience and affordability. The Fiama shower gel range and the recently launched Vivel Lotus Oil soap continued to garner impressive traction from consumers. During the quarter, the business also launched moisturising skin cream under the recently acquired Charmis brand. The company made steady progress during the quarter towards setting up state-ofthe-art owned integrated consumer goods manufacturing facilities at Panchla (West Bengal) and Kapurthala (Punjab). These facilities are expected to commence operations in phases, beginning the ensuing quarter. The non-cigarette FMCG business is likely to scale up on account of re-stocking by various trade channels and pick-up in the demand environment because of better monsoon. We expect business revenue to grow in double digits in H2FY2018 and expect gradual improvement in profitability. Agri business Revenue grew by ~5% YoY The agri business posted 4.7% YoY revenue growth to Rs.1,968 crore and posted PBIT of Rs.256.2 crore, down 13.7% YoY. Performance of the agri business segment during the quarter was impacted by shortage of leaf tobacco in Andhra Pradesh due to lower crop output on account of drought in 2016 and adverse crop quality, relative strength of rupee vis-à-vis major currencies and limited trading opportunities in other agri-commodities. Hotel business Flat performance with improvement in profitability The hotels business registered flat performance in Q2FY2018, with revenue growing to Rs.300.2 crore. During the quarter, room revenue grew at a healthy pace on account of higher ARRs. However, food and beverage revenue growth was impacted by highway liquor ban, which prevailed for a significant part of the quarter. commissioned WelcomHotel Coimbatore on October 1, 2017 and made steady progress during the quarter in the construction of Hotels at Hyderabad, Kolkata and Ahmedabad and WelcomHotels in Guntur and Bhubaneswar. October 27, 2017 6
Paperboard, paper and packaging business Revenue declined due to subdued demand environment but profitability improved Revenue of the PPP business marginally declined by 1.7% YoY to Rs.1,309.4 crore during the quarter on account of subdued demand environment prevailing in the FMCG and legal cigarette industry, surplus capacity in the domestic industry along with zero duty imports under Free Trade Agreement with ASEAN countries and cheap imports from China. PBIT registered robust growth of 18.2%, driven by richer product mix and structural cost-saving initiatives. Improvement in profitability was also aided by benign input costs. Capacity utilisation of India s first bleached chemical thermo mechanical pulp mill (BCTMP) was progressively ramped up, thereby reducing dependence on imported pulp. Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. October 27, 2017 7
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