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TRANSCRIPT
June 19, 2018 1
Rating: BUY | CMP: Rs266 | TP: Rs346
Valuations reflect FEAR rather than recovery
We reiterate BUY on ITC given that the stock is available at 22.4x FY20 EPS
(50% discount to large cap consumer names) and offers 2% dividend yield
due to FEAR related to cigarette tax increases. However, we expect relatively
moderate increase in cigarette taxes in medium term given 1) Rs200bn
surplus and robust compensation cess collections in April and May 2018 and
2) 18-40% advalorem component in cigarette GST. We estimate 3% volume
growth and double digit EBIT growth in cigarettes given low base and
improved product mix. (FY18, 6.6% EBIT growth on 3.3% volume decline).
FMCG business is on cusp of sharp improvement in profits (est 2x growth in
3 years) given rising scale and peaked out losses in personal care and
Lifestyle retailing. Paperboard business is expected to improve margins
given benign input costs, benefits from refurbishment of Décor machine and
expected capacity expansion. We expect higher ARR and occupancy rates to
improve profitability in Hotels. Lower production and high prices of leaf
tobacco in India will drag Agri business, despite some relief from INR
depreciation. Retain “Buy” with SOTP based target price of Rs346.
Compensation cess collections healthy: Central Govt. collected Rs620bn
as compensation cess on SIN goods in FY18 (Est 411bn) and is thus sitting on
surplus of Rs200bn. FY19 budget target is Rs611bn while the collections in
April and May have been Rs159bn (Rs143bn excluding imports) which
alleviates any urgency to increase compensation cess. We expect little or
moderate change in taxes on cigarettes in the current year.
Estimate 3% Cigarette volume growth in FY19: ITC’s cigarette volumes had
declined ~2.5% in 4Q (7% in 2Q and 5% in 3Q), we expect 1Q volumes to be
flattish to slightly negative. Although RSFT and KSFT had seen brunt of volume
pressure, KSFT has now stabilized. We expect gradual mix improvement in
coming quarters given increasing discretionary spends in the economy. We
estimate 3% volume growth in FY19.
FMCG profitability expected to improve: ITC reported sales and EBIT of
Rs113bn and Rs1.64bn in FY18 as margins increased 118bps to 1.4%. We
expect margin expansion to sustain in coming years led by 1) lower drag from
incubation businesses in foods 2) likely reduction in personal care losses
significantly given success of new innovations and cost cutting 3) lower losses
in Lifestyle retailing as ITC has already taken major part of pain. We estimate
FMCG EBIT to increase to Rs5.3bn by FY20.
Hotels and Paperboard on recovery path, INR depreciation positive for
Leaf Tobacco; Hotels business is reporting improved ARR and robust growth
in F&B and is on steady recovery. Paperboard business is getting the benefit
of using higher in-house pulp (33% v/s 25% earlier) and cheaper inputs despite
pressure on user industries. Expected pickup in cigarettes and FMCG will
improve margins from current levels. Agri Business sales decline 2.3% EBIT
declined 6.4% as higher leaf tobacco prices, lower output and quality due to
drought in AP and strong currency curtailed exports. Higher wheat production
in Russia and lower domestic surplus also limited trading opportunities.
However, INR depreciation is expected to provide support to leaf tobacco
exports in FY19.
ITC (ITC IN)
June 19, 2018
Company Update
☑ Change in Estimates | Target | Reco
Change in Estimates
Current Previous
FY19E FY20E FY17E FY18E
Rating BUY BUY
Target Price 346 346
Sales (Rs.m) 4,71,122 5,12,342 4,72,132 5,13,403
% Chng. (0.2) (0.2)
EBITDA (Rs.m) 1,81,182 2,04,852 1,82,105 2,04,811
% Chng. (0.5) (0.0)
EPS (Rs.) 10.5 11.9 10.5 11.8
% Chng. - 0.8
Key Financials
FY17 FY18 FY19E FY20E
Sales (Rs. bn) 401 406 471 512
EBITDA (Rs. bn) 146 155 181 205
Margin (%) 36.4 38.3 38.5 40.0
PAT (Rs. bn) 102 112 128 147
EPS (Rs.) 8.4 9.2 10.5 11.9
Gr. (%) (27.6) 9.5 13.7 13.7
DPS (Rs.) 4.7 5.2 6.2 6.8
Yield (%) 1.8 1.9 2.3 2.6
RoE (%) 23.5 23.2 23.8 24.7
RoCE (%) 35.7 34.2 36.1 37.3
EV/Sales (x) 7.7 7.7 6.6 6.0
EV/EBITDA (x) 21.3 20.1 17.1 15.0
PE (x) 31.7 28.9 25.4 22.4
P/BV (x) 7.1 6.3 5.8 5.2
Key Data ITC.BO | ITC IN
52-W High / Low Rs.368 / Rs.250
Sensex / Nifty 35,287 / 10,710
Market Cap Rs.3,247bn/ $ 47,541m
Shares Outstanding 12,203m
3M Avg. Daily Value Rs.5143.33m
Shareholding Pattern (%)
Promoter’s -
Foreign 18.00
Domestic Institution 37.10
Public & Others 44.90
Promoter Pledge (Rs bn)
Stock Performance (%)
1M 6M 12M
Absolute (5.8) 0.7 (14.4)
Relative (6.9) (3.5) (24.1)
Amnish Aggarwal
[email protected] | 91-22-66322233
Nishita Doshi
[email protected] | 91-22-66322381
ITC
June 19, 2018 2
Q4FY18 Result Overview (Rs m); Overall Sales down 4.8%, Adj. PAT up 9.9%
Y/e March Q4FY18 Q4FY17 YoY gr. (%) Q3FY18 FY18 FY17 YoY gr. (%)
Net Sales 1,05,867 1,11,255 (4.8) 97,720 4,06,275 4,00,887 1.3
EBITDA 41,440 38,754 6.9 39,045 1,55,564 1,45,780 6.7
Margins (%) 39.1 34.8 4.3 40.0 38.3 36.4 1.9
Depreciation 3,040 2,418 25.7 2,908 11,454 10,380 10.3
Interest 232.4 (114.6) (302.8) 240 867 230 277.6
Other Income 5,165 4,021 28.5 6,269 21,144 19,859 6.5
PBT 43,333 40,471 7.1 42,167 1,64,388 1,55,030 6.0
Tax 14,006 13,777 1.7 13,965 54,856 53,021 3.5
Rate (%) 32.3 34.0 (1.7) 33.1 33.4 34.2 (0.8)
Adj. PAT 29,327 26,695 9.9 28,202 1,09,533 1,02,009 7.4
Source: Company, PL
Cigarettes are 42.9% of Sales, FMCG 26.5%
Cigarettes42.9%
FMCG 26.5%
Hotels3.5%
Agri business
15.7%
Paper and packaging
11.3%
Source: Company, PL
Cigarettes are 86.8% of EBIT
Cigarettes86.8%
FMCG 2.3%
Hotels1.9%
Agri business
3.1%
Paper and packaging
6.0%
Source: Company, PL
Cigarettes: Volumes down ~2.5%, QoQ recovery visible
-14
-12
-17
-14.5
-4
0.5
3 3.5
-0.5
01.5
-7
-5
-2.5
-20
-15
-10
-5
0
5
3Q
FY
15
4Q
FY
15
1Q
FY
16
2Q
FY
16
3Q
FY
16
4Q
FY
16
1Q
FY
17
2Q
FY
17
3Q
FY
17
4Q
FY
17
1Q
FY
18
2Q
FY
18
3Q
FY
18
4Q
FY
18
Source: Company, PL
Cigarette Volumes recovery
underway, 64mm 38% of volumes
Mix has stabilized, expect growth to
resume in KSFT given stable taxes
and prices and improved
discretionary spends
Expect stable taxes given strong
trends in compensation Cess
collection, EBIT grew by 6.6% in
FY18 despite severe pressure on all
fronts
ITC
June 19, 2018 3
FMCG profits at all-time high; Hotels on steady recovery path
4QFY17 1QFY18 2QFY18 3QFY18 4Q18
Cigarette Volume Growth % 0.0 1.5 -7.0 -5.0 -2.5
Sales (INR m) 1,17,128 1,15,503 1,09,359 1,07,159 1,15,054
Cigarettes 51,493 45,242 45,542 46,292 49,365
FMCG 28,858 26,009 28,041 28,718 30,518
Hotels 3,865 3,049 3,002 4,044 4,080
Agri business 19,185 27,605 19,680 15,309 18,083
Paper and packaging 13,727 13,598 13,094 12,796 13,008
Sales growth (YoY)
Cigarettes (39.7) (45.0) (2.1) 14.2 (4.1)
FMCG 6.5 9.0 5.0 11.8 5.8
Hotels 6.5 6.1 1.0 9.2 5.6
Agri business 6.2 (1.2) 4.7 (8.4) (5.7)
Paper and packaging 4.4 2.8 4.6 (4.2) (5.2)
EBIT (INR m) 37,563 37,773 38,468 38,726 40,388
Cigarettes 32,588 32,741 32,917 32,693 35,058
FMCG 556 54 205 470 912
Hotels 669 53 42 548 755
Agri business 1,349 2,351 2,562 2,333 1,240
Paper and packaging 2,402 2,573 2,742 2,683 2,424
EBIT growth (YoY) 6.9 8.3 2.8 9.4 7.5
Cigarettes 8.0 9.0 2.3 7.8 7.6
FMCG (29.3) 220.1 728.5 339.0 64.2
Hotels 56.9 335.2 552.3 29.9 12.8
Agri business (20.8) (0.9) (13.7) (1.4) (8.1)
Paper and packaging 18.3 3.9 18.2 9.0 0.9
EBIT Margin (%)
Cigarettes 63.3 72.4 72.3 70.6 71.0
FMCG 1.9 0.2 0.7 1.6 3.0
Hotels 17.3 1.7 1.4 13.5 18.5
Agri business 7.0 8.5 13.0 15.2 6.9
Paper and packaging 17.5 18.9 20.9 21.0 18.6
Source: Company, PL
We have estimates net sales for 4QFY17 based on the excise duty trends in
cigarettes and various other products
Packagd food business has stabilised
Instant Noodles market share at 24-
25% and leadership in Bingo Tedhe
Medhe.
Premium Biscuits continue to do well,
creams growth has slowed down.
Coffee and Premium Chocolates are
new growth frontiers, Dairy is a
challenging business given indian
conditions.
Engage is clear No2 with 10-11%
share and Savlon is rapidly gaining
share in liquid handwash.
ITC has entered Home care with
acquisition of Nimyle brand of floor
cleaners which has presence in West
bengal and Odisha.
Paper should benefit from higher in-
house pulp, lower inputs and
expected incraese in demand from
FMCG and Cigarette business
Hotels business revenue increased
due to higher ARR and recovery in
F&B revenues post resolution of
highway ban issue. ITC has started
operations at ITC Kohenur, a luxury
collection property at Hyderabad
INR depreciation is expected to
restore lost competitiveness of Indian
Leaf tobacco and improve
performance in FY19.
ITC
June 19, 2018 4
Financials
Income Statement (Rs m)
Y/e Mar FY17 FY18 FY19E FY20E
Net Revenues 4,00,887 4,06,275 4,71,122 5,12,342
YoY gr. (%) 9.6 1.3 16.0 8.7
Cost of Goods Sold 1,59,763 1,57,991 1,76,636 1,94,907
Gross Profit 2,41,124 2,48,285 2,94,486 3,17,435
Margin (%) 60.1 61.1 62.5 62.0
Employee Cost 24,443 24,865 27,573 28,486
Other Expenses 37,189 35,491 46,069 44,584
EBITDA 1,45,781 1,55,409 1,81,182 2,04,852
YoY gr. (%) 6.3 6.6 16.6 13.1
Margin (%) 36.4 38.3 38.5 40.0
Depreciation and Amortization 10,380 11,454 12,167 13,033
EBIT 1,35,400 1,43,956 1,69,015 1,91,819
Margin (%) 33.8 35.4 35.9 37.4
Net Interest 230 867 674 674
Other Income 19,859 21,298 25,102 29,904
Profit Before Tax 1,55,030 1,64,388 1,93,443 2,21,049
Margin (%) 38.7 40.5 41.1 43.1
Total Tax 53,021 52,156 65,190 74,493
Effective tax rate (%) 34.2 31.7 33.7 33.7
Profit after tax 1,02,009 1,12,232 1,28,253 1,46,555
Minority interest - - - -
Share Profit from Associate - - - -
Adjusted PAT 1,02,009 1,12,232 1,28,253 1,46,555
YoY gr. (%) 9.4 10.0 14.3 14.3
Margin (%) 25.4 27.6 27.2 28.6
Extra Ord. Income / (Exp) - - - -
Reported PAT 1,02,009 1,12,232 1,28,253 1,46,555
YoY gr. (%) 9.4 10.0 14.3 14.3
Margin (%) 25.4 27.6 27.2 28.6
Other Comprehensive Income 770 3,823 - -
Total Comprehensive Income 1,02,779 1,16,056 1,28,253 1,46,555
Equity Shares O/s (m) 12,147 12,204 12,264 12,324
EPS (Rs) 8.4 9.2 10.5 11.9
Source: Company Data, PL Research
Balance Sheet Abstract (Rs m)
Y/e Mar FY17 FY18 FY19E FY20E
Non-Current Assets
Gross Block 2,46,939 2,64,880 2,84,993 3,05,193
Tangibles 2,38,962 2,56,266 2,76,179 2,96,179
Intangibles 7,977 8,614 8,814 9,014
Acc: Dep / Amortization 97,680 1,09,133 1,21,299 1,34,332
Tangibles 93,812 1,04,979 1,16,855 1,29,590
Intangibles 3,868 4,154 4,445 4,742
Net fixed assets 1,49,259 1,55,748 1,63,694 1,70,861
Tangibles 1,45,150 1,51,287 1,59,324 1,66,589
Intangibles 4,109 4,460 4,369 4,272
Capital Work In Progress 34,913 50,169 30,000 30,000
Goodwill - - - -
Non-Current Investments 85,912 1,35,012 1,40,710 1,46,978
Net Deferred tax assets (18,717) (19,179) (20,138) (21,145)
Other Non-Current Assets 26,701 37,669 30,623 33,302
Current Assets
Investments 1,00,998 99,035 1,28,435 1,71,152
Inventories 78,640 72,372 94,721 1,03,039
Trade receivables 22,075 23,570 26,240 27,848
Cash & Bank Balance 27,473 25,949 27,999 30,175
Other Current Assets 6,106 12,584 7,067 7,685
Total Assets 5,42,160 6,23,627 6,62,160 7,34,976
Equity
Equity Share Capital 12,147 12,204 12,264 12,324
Other Equity 4,41,262 5,01,796 5,49,667 6,14,731
Total Networth 4,53,410 5,14,001 5,61,932 6,27,055
Non-Current Liabilities
Long Term borrowings 180 111 53 -
Provisions 1,314 1,219 1,471 1,550
Other non current liabilities 147 383 421 463
Current Liabilities
ST Debt / Current of LT Debt 0 0 0 0
Trade payables 25,512 33,823 28,191 30,431
Other current liabilities 42,788 54,557 49,566 53,903
Total Equity & Liabilities 5,42,160 6,23,627 6,62,160 7,34,976
Source: Company Data, PL Research
ITC
June 19, 2018 5
Cash Flow (Rs m)
Y/e Mar FY17 FY18 FY19E FY20E Year
PBT 1,55,030 1,64,388 1,93,443 2,21,049
Add. Depreciation 10,380 11,454 12,167 13,033
Add. Interest 230 867 674 674
Less Financial Other Income 19,859 21,298 25,102 29,904
Add. Other (10,403) (12,903) (7,097) (10,000)
Op. profit before WC changes 1,55,236 1,63,805 1,99,186 2,24,756
Net Changes-WC (7,056) 19,095 (59,394) (46,783)
Direct tax (53,021) (52,156) (65,190) (74,493)
Net cash from Op. activities 95,160 1,30,744 74,602 1,03,480
Capital expenditures (30,252) (33,197) 55 (20,200)
Interest / Dividend Income - - - -
Others (8,964) (42,639) (16,063) (8,945)
Net Cash from Invt. activities (39,215) (75,836) (16,007) (29,145)
Issue of share cap. / premium 26,976 13,295 19,925 20,195
Debt changes (114) (69) (59) (53)
Dividend paid (81,736) (69,447) (75,737) (91,627)
Interest paid (230) (867) (674) (674)
Others - - - -
Net cash from Fin. activities (55,104) (57,087) (56,544) (72,159)
Net change in cash 841 (2,178) 2,051 2,176
Free Cash Flow 64,908 97,547 74,658 83,280
Source: Company Data, PL Research
Quarterly Financials (Rs m)
Y/e Mar Q1FY18 Q2FY18 Q3FY18 Q4FY18
Net Revenue 99,547 1,03,141 97,720 1,05,867
YoY gr. (%) (1.0) 6.8 5.7 (4.8)
Raw Material Expenses 38,360 43,564 35,810 40,012
Gross Profit 61,187 59,578 61,910 65,855
Margin (%) 61.5 57.8 63.4 62.2
EBITDA 37,464 37,615 39,045 41,440
YoY gr. (%) (3.3) 0.4 3.8 6.1
Margin (%) 37.6 36.5 40.0 39.1
Depreciation / Depletion 2,682 2,824 2,908 3,040
EBIT 34,782 34,791 36,138 38,400
Margin (%) 34.9 33.7 37.0 36.3
Net Interest 104 290 240 232
Other Income 4,768 4,942 6,269 5,165
Profit before Tax 39,446 39,443 42,167 43,333
Margin (%) 39.6 38.2 43.2 40.9
Total Tax 13,841 13,045 13,965 14,006
Effective tax rate (%) 35.1 33.1 33.1 32.3
Profit after Tax 25,605 26,398 28,202 29,327
Minority interest - - - -
Share Profit from Associates - - - -
Adjusted PAT 25,605 26,398 28,202 29,327
YoY gr. (%) 7.4 5.6 6.6 9.9
Margin (%) 25.7 25.6 28.9 27.7
Extra Ord. Income / (Exp) - - 2,700 -
Reported PAT 25,605 26,398 30,902 29,327
YoY gr. (%) 7.4 5.6 16.8 9.9
Margin (%) 25.7 25.6 31.6 27.7
Other Comprehensive Income 1,568 (290) 869 1,677
Total Comprehensive Income 27,173 26,108 31,771 31,004
Source: Company Data, PL Research
Key Financial Metrics
Y/e Mar FY17 FY18 FY19E FY20E
Per Share(Rs)
CEPS 9.3 10.1 11.4 12.9
BVPS 37.3 42.1 45.8 50.9
FCF 5.3 8.0 6.1 6.8
DPS 4.7 5.2 6.2 6.8
Return Ratio(%)
Core RoCE 44.1 40.1 44.3 48.8
RoCE 35.7 34.2 36.1 37.3
ROIC 26.9 24.9 27.4 27.9
RoE 23.5 23.2 23.8 24.7
Balance Sheet
Net Debt : Equity (x) (0.3) (0.2) (0.3) (0.3)
Net Working Capital (Days) 68 56 72 72
Valuation(x)
PER 31.7 28.9 25.4 22.4
P/B 7.1 6.3 5.8 5.2
P/CEPS 9.3 10.2 11.5 13.0
EV/EBITDA 21.3 20.1 17.1 15.0
EV/Sales 7.7 7.7 6.6 6.0
Dividend Yield (%) 1.8 1.9 2.3 2.6
Source: Company Data, PL Research
ITC
June 19, 2018 6
Price Chart Recommendation History
No. Date Rating TP (Rs.) Share Price (Rs.)
1 04-Jul-17 BUY 400 342
2 11-Jul-17 BUY 400 333
3 18-Jul-17 BUY 370 326
4 27-Jul-17 BUY 370 289
5 09-Oct-17 BUY 370 266
6 27-Oct-17 BUY 333 269
7 10-Jan-18 BUY 333 271
8 20-Jan-18 BUY 333 274
9 12-Feb-18 BUY 333 271
10 15-Mar-18 BUY 333 266
11 13-Apr-18 BUY 333 261
12 16-May-18 BUY 346 286
13 23-May-18 BUY 346 279
Analyst Coverage Universe
Sr. No. CompanyName Rating TP (Rs) Share Price (Rs)
1 Asian Paints Accumulate 1234 1215
2 Avenue Supermarts Reduce 1003 1490
3 Britannia Industries BUY 6170 5596
4 Colgate Palmolive Reduce 1075 1208
5 Dabur India Accumulate 377 371
6 Emami Accumulate 1154 1086
7 Future Retail BUY 627 608
8 GlaxoSmithKline Consumer Healthcare Accumulate 6800 5919
9 Hindustan Unilever Accumulate 1627 1573
10 ITC BUY 346 279
11 Jubilant FoodWorks Accumulate 2870 2560
12 Kansai Nerolac Paints BUY 526 506
13 Manpasand Beverages BUY 500 409
14 Marico Accumulate 313 312
15 Nestle India UR 0 8692
16 Pidilite Industries Accumulate 1175 1139
17 Titan Company BUY 1114 915
18 Tribhovandas Bhimji Zaveri Accumulate 120 106
PL’s Recommendation Nomenclature (Absolute Performance)
BUY : > 15%
Accumulate : 5% to 15%
Hold : +5% to -5%
Reduce : -5% to -15%
Sell : < -15%
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly
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(Rs)
ITC
June 19, 2018 7
ANALYST CERTIFICATION
(Indian Clients)
We/I, Mr.Amnish Aggarwal- MBA, CFA, Ms.Nishita Doshi- CA, CFA Level 1, B.Com Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
(US Clients)
The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report.
DISCLAIMER
Indian Clients
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