FMCG major ITC is scheduled to report its December quarter results on Wednesday. The result will be watched for trends in cigarette volumes and the demand outlook for FMCG categories and segmental profitability.
The company had posted 11.9 per cent growth in its net profit for the quarter ended September 31, 2018, at Rs 2,955 crore. The same during the corresponding quarter of the previous financial year stood at Rs 2,640 crore.
Here’s what top brokerages expect from ITC’s December quarter earnings-
We expect net sales to grow 9 per cent year-on-year (YoY) to Rs 10,650 crore, with cigarette volume growth at 4 per cent (base quarter saw 3 per cent volume decline). Cigarette EBIT (earnings before interest and taxes) is expected to grow 8 per cent YoY. We have factored in EBITDA (Earnings before interest, tax, depreciation and amortization) growth of 9 per cent YoY to Rs 4240 cr and EBITDA margin is expected to be flat at 39.8 per cent in 3QFY19.
‘Other FMCG’ revenue is likely to grow 8 per cent YoY. We estimate adjusted PAT to grow 6.9 per cent YoY to Rs 3,000 crore. The stock trades at 28.9x/25.6x FY19E/20E EPS (earnings per share) of Rs 9.7/Rs 10.9 and we maintain ‘Neutral’ rating.
Key monitorables include trends in cigarette volumes and demand outlook for FMCG categories and segmental profitability.
This apart, a ministerial panel under the Goods and Services Tax (GST) Council held on 6th January approved Kerala’s request to levy an additional 1 per cent calamity cess. Cigarettes are a likely candidate for the cess. The cess at 1 per cent is moderate and hence, a small positive for ITC.
ITC trades nearly at 40 per cent discount to consumer universe given investor’s fears of frequent increase in GST rates on cigarettes post 20 per cent increase under excise and introduction of GST. Cigarette volumes are gradually recovering on stabilisation of sales mix and cigarette prices, stable taxation regime and low base post 17 per cent volume erosion in five years.
We expect 3 per cent volume growth in FY18-20. FMCG profits are expected to increase by 2-3 times in the coming few years, given scaled up food business and peaked out losses in lifestyle retailing. Paperboard margins are expected to improve on benign input costs, gains of the refurbishment of Décor machine and revamp of 1.5 lakh tonnes per annum (TPA) value-added paperboard machine.
Agri is likely to remain under pressure, however, rupee depreciation should provide some relief. Hotels profitability is likely to improve on higher average room rate (ARR) and occupancy and growth in food and beverages (F&B) sales. We retain ‘Buy’ at 21.6xFY21 EPS, nearly 65 per cent dividend payout with 2.9 per cent dividend yield.
ITC is expected to post 11.4 per cent YoY sales growth during the quarter on the back of robust growth from the cigarettes and FMCG segments. The cigarettes segment is likely to witness nearly 4 per cent volume growth on a low base (4 per cent volume de-growth in Q3FY18). Driven by new launches & premiumisation across categories within the space during the quarter should perk up FMCG segment growth of 18 per cent growth during the quarter. With improving margins in the FMCG business and higher realisations in the cigarette business, net profit (adjusted for one-offs in base quarter) is likely to grow by 13.8 per cent YoY to Rs 3,195.9 crore. We maintain ‘BUY’ rating.
ITC’s cigarette segment posted robust volume growth of nearly 6 per cent in Q2FY19. In addition to strong growth from the cigarette segment, sales growth of 7.3 per cent YoY was supported by FMCG, agri business, paperboard and hotels business growth of 12.7 per cent, 12.8 per cent, 8.8 per cent and 20.8 per cent, respectively.
With the government’s impetus to boost rural incomes coupled with normal monsoons this year, we expect to witness a broad-based recovery in volume growth. We initiate our coverage on ITC with a ‘BUY’ rating and a target price of Rs 352 per share.
The key risks include regulatory and macroeconomic scenario.