UBS : ITC - Cigarette segment trends remain good

UBS Investment Research
ITC
C igarette segment trends remain good
􀂄 Event: net cigarette revenue +16.4%, underlying volumes ~7.5%
We estimate Q2 FY12 cigarette volumes to have grown ~7.5%, while mix and
price increases contributed to ~8-9% of sales growth. EBIT margins in cigarettes
increased to 31.5% (29.9% in Q1 FY12). Cigarette business segmental profits grew
+18.6% YoY. We have built in a ~6.5% volume growth for FY12E.
􀂄 Impact: ITC’s Q2 FY12 revenues +18% YoY, EBITDA +17.8% YoY
Overall ITC revenues grew 18% YoY, with other FMCG +27.2%, agribusiness
+14.8%, and paperboards +10% YoY. Losses of the consumer business declined to
Rs559m vs. Rs669m in Q2 FY11, a reflection of the increasing profit focus in this
business. The hotel business profitability reflects the slowdown in discretionary
consumption, while the paperboard business posted 27.5% EBIT margins (highest
ever). Other income was +38.7%, PBT +21%, and PAT +21.5%.
􀂄 Action: reiterate Buy on ITC
We reiterate our Buy rating on ITC as we believe its cigarette volume growth and
price increases will drive overall growth in FY12. Declining losses in other FMCG
will also aid profitability growth. The key trigger for FY13 remains taxation
increases, unknown till Budget 2012; we have built in a ~10% increase in our
estimates.
􀂄 Valuation: Buy rating and price target of Rs240
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool (assuming a 10.5% WACC
and a 12% interim period growth rate). At our price target, ITC would trade at 25x
FY13E PE.