*ITC - Sharekhan* * *Recommendation: Buy Price target: Rs369 Current market price: Rs328
*Price target revised to Rs369* Result highlights - *Revenue growth remains muted; margin expansion led to decent operating performance: *ITC's Q2FY2014 performance was disappointing in terms of the revenue growth as some of the key businesses, such as the cigarette business and non-cigarette fast moving consumer goods (FMCG) business, witnessed a moderation in the revenue growth, while the revenues of the agri business declined in double-digits during the quarter. However, the significant margin improvement in the core cigarette business and commoditised agri business along with the declining losses in the non-cigarette FMCG business aided the company to post a decent operating performance with the operating profit margin (OPM) improving by above 100 basis points during the quarter. - *Cigarette business' sales volume declined by ~4%: *In Q2FY2014, ITC's cigarette sales volume declined by ~4% on account of the significant price increases (of around 18%) in its portfolio after the second consecutive year of 18% hike in the excise duty and value added tax (VAT) hike in some of the key states. The brands under 65mm cigarette segment gained good response and helped arrest the substantial drop in ITC's cigarette sales volume. We don't expect ITC to increase prices of the cigarette in the near term and would rather focus on improving the sales volume in the near term. With price increases getting absorbed in the coming months, we might see a gradual improvement in the sales volume of the cigarette business. The non-cigarette FMCG business' revenue growth decelerated to 16% in line with the overall slowdown in the domestic FMCG market. The hotel business is bearing the brunt of a bleak macro-economic environment. - *Downward revision in earnings estimates:* We have revised downward our earnings estimates marginally for FY2014 and FY2015 by 1% and 3% respectively to factor in the lower revenue growth in the core cigarette business and the agri business. We have marginally revised upward our margin expectation to factor the higher than expected margin in the cigarette and agri businesses. - *Maintained Buy on account of better earnings visibility and decent valuation:* A volume decline of 4% in the core cigarette business in Q2FY2014 has disappointed us as well as the Street. However, the historical trend has shown that the sales volume in the cigarette business recovered once the price increases get stabilised in the market. We expect the non-cigarette FMCG business to witness an improvement in the growth rates with the inflationary pressure easing, while the higher margin commodity exports would continue to help the agri business to score good margin in the coming years. This along with the higher yields earned on cash on books would help ITC to achieve a decent growth of close 20% over FY2013-15, which is better in comparison with some other large-cap FMCG stocks such as Hindustan Unilever Ltd (HUL). We have revised downward our price target to Rs369, which is in line with our downward revision in our earnings estimates. After the announcement of Q2FY2014 results, ITC's stock price has corrected by almost 5% and provides a decent upside of 10% from the current levels to our price target. In view of the better earnings visibility, strong cash generation ability and a decent upside from the current levels, we maintain our Buy recommendation on ITC and maintain it as our top pick in the large cap FMCG space. At the current market price, the stock trades at 29.7x its FY2014E earnings per share (EPS) of Rs11.1 and 24.9x its FY2015E EPS of Rs13.2. -- CA. Rajesh Desai -- You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. To post to this group, send email to [email protected]. Visit this group at http://groups.google.com/group/globalspeculators. For more options, visit https://groups.google.com/groups/opt_out.
