ITC: Results in-line with Street estimates

ITC offers the best earnings visibility in the sector especially when sector peers are confronting multiple challenges, analysts say

ITC Ltd posted a year-on-year rise of 16% in its net profit for the quarter ended December 2013 at Rs 2,385 crore, while net sales came in 13.1% higher on year-on-year (y-o-y) basis at Rs 8,623 crore.

Net sales from the FMCG business came in at Rs 2,078 crore, as compared to Rs 1,782.70 crore in the year ago period. On the other hand, profit from the hotel business improved to Rs 62.2 crore in the recently concluded quarter, as against Rs 55.49 crore in a year ago period.

The stock, however, ended the day flat at Rs 324.85 on the Bombay Stock Exchange (BSE). A total of 816,5755 shares were traded on both the exchanges.

Meeting expectations

The results were in-line with most analysts’ estimates. For instance, Prasad Deshmukh, a research analyst with DSP Merrill Lynch (India) expected cigarette volumes to decline y-o-y by about 2% in Q3 given strong YTD price hikes.

“FMCG business is expected to maintain momentum led by distribution linked growth. We expect revenue/ PAT growth at +11.6%/+17.1% and 173bp y-o-y EBITDA margin expansion led by better pricing in cigarettes,” Prasad had said in his result preview note.

Analysts at Axis Capital, too, expected the price hikes to aid cigarettes revenue and built in 2% cigarettes volume decline in their estimates and expected 17% growth each in FMCG and agribusiness but a mid-single digit in paper and hotels segments due to slowing economic growth.

Cigarettes business posted a 12.5% y-o-y growth in net sales to Rs 4,116 crore aided by the price hikes taken by the company, even though volumes are expected to have de-grown by 2–3%, analysts say.

“For Q3FY2014, ITC’s performance was in-line with estimates. Healthy realisation resulted in Cigarettes business posting 18.8% y-o-y growth in its EBIT (earnings before interest and taxes),” said V. Srinivasan, research analyst – FMGC with Angel Broking.

Segmental performance

Among the other segments, paperboards and packaging divisions’ revenue grew by 18.5% y-o-y. However, segmental EBIT remained flat on account of increase in input costs. Hotels business posted a flat performance on the top-line front reporting net revenue of Rs 315 crore.

Adds Ritwik Rai, FMCG Analyst, Kotak Securities: “ITC’s results have come in ahead of our expectations, on revenues as well as profits. Cigarette revenue growth is in-line with our expectations, and we believe volume de-growth has softened since last quarter, to about 2-2.5%. Relative to our estimates, ITC has posted stronger revenues in the agri and paperboards business.”

“Cigarette margins have remained strong, registering 3.3 percentage point gain approximately (PBIT/ gross sales basis). Along with margin improvements in the hotels and non-cigarette FMCG segment, strength in cigarette margins have helped surprise us positively on operating profits. Though we view the results positively, we continue to think that valuations of ITC (27X PER FY15E) are stretched given growth prospects,” he adds.

Rikesh Parikh, VP Institution Corporate Broking, Motilal Oswal Securities expects ITC’s cigarette volume decline to arrest towards Q4FY14 and recover in FY15, while non-cigarette business to report EBIT breakeven in FY14. According to him, ITC offers the best earnings visibility in the sector especially when sector peers are confronting multiple challenges; it also trades at a discount to most of the consumer universe. He maintains BUY rating on the stock.