ITC Ltd. – Q2FY15 Result Update
RETAIL RESEARCH
Nov 07, 2014
HDFC sec Scrip code
Industry
CMP (Rs.)
Recommended Action
Averaging price band (Rs.)
Target (Rs.)
Time Horizon
ITCLTDEQNR
FMCG
355.7
Buy at CMP and add on dips
326-341
377
1 quarter
In our Q1FY15 result update dated Aug 07, 2014, we had recommended existing investors to buy ITC at the then CMP of Rs. 346.4 and add it on dips to Rs. 312-326 for a
price target of Rs. 377. Thereafter the stock touched a low of Rs. 341.9 on Aug 22, 2014 and subsequently made a high of Rs. 379.8 on Sept 25, 2014 thus meeting our
target. Currently, it is quoting at Rs. 355.7.
ITC’s Q2FY15 results were more or less in line with our estimates. We present an update on the stock.
Q2FY15 Results Review
Y-o-Y:
 Net sales increased by 14.8% Y-o-Y to Rs. 89.9 bn as against Rs. 77.8 bn in Q2FY14, driven by cigarettes & Agri business (which grew by 14.2% & 16.1% Y-o-Y
respectively). Cigarettes volumes declined by ~3-4%. FMCG business witnessed moderation in growth, which stood at 11.9% (though slightly better than Y-o-Y growth
in Q1FY15). Paperboard & Packaging and Hotels grew in single digits by 8.9% & 5.9% Y-o-Y respectively.
 The core operating profit grew by 10.4%, while the OPM fell by 145 bps Y-o-Y to 36.3%, impacted by higher material cost (up 19.4% Y-o-Y) and other expenses (up
18.2% Y-o-Y). However, relatively lower growth in the employee cost (up 7.6% Y-o-Y) restricted further margin contraction. Cigarettes business witnessed margin
expansion of 304 bps Y-o-Y (after adjusting for one off gains in Q2FY14), while margins of Agri business fell by 157 bps Y-o-Y. FMCG - others business lowered its losses
from Rs. 126.9 mn in Q2FY14 to Rs. 103.1 mn in Q2FY15. Paperboard & Packaging business witnessed marginal margin expansion of 13 bps Y-o-Y respectively. Hotels
business reported loss of Rs. 95.8 mn compared to profit of Rs. 87.2 mn in Q2FY14.
 Reported PAT grew by 8.7% Y-o-Y, impacted by higher tax rates (up 130 bps Y-o-Y) and absence of one off gains (in Q2FY14, ITC reported one off gains of Rs. 1579.1 mn
pertaining to write back of liability for earlier years towards rates & taxes no longer required). However, Adjusted PAT (after adjusting for one off gains) grew by 15.6%
Y-o-Y, while PAT margins improved by 18 bps Y-o-Y to 27.2%, aided by higher other income (up 35.1% Y-o-Y). EPS for the quarter stood at Rs. 3 (on equity of Rs. 7974.3
mn) vs. Rs. 2.6 in Q2FY14 (on equity of Rs. 7920 mn).
Q-o-Q:
 Sequentially, the net sales de-grew by 2.6%, led by FMCG Others & Hotels (up 13.5% & 5.2% respectively). Cigarettes business grew marginally by 1.2% Q-o-Q, while
Paperboard packaging & Agri business witnessed a decline of 0.3%. & 37.5% Q-o-Q in their respective revenues.
 Operating profit rose 1.4% Q-o-Q, while OPM rose by 140 bps Q-o-Q, aided by decline in material & employee cost (down 10.6% & 21.8% Q-o-Q respectively). PAT
grew by 10.7%, while PAT margins improved by 330 bps Q-o-Q, aided by higher other income (up 41.2% Q-o-Q) & decline in effective tax rate (down 73 bps Q-o-Q).
 Segment-wise, Cigarettes business witnessed margin expansion of 301 bps Q-o-Q, while FMCG & Hotels business managed to reduce their respective PBIT losses
sequentially. Agri business witnessed 835 bps Q-o-Q expansion in margins. However, Paperboard & Packaging PBIT margins fell by 248 bps Q-o-Q.
RETAIL RESEARCH
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Quarterly Financials:
(Rs. in Million)
Particulars
Q2FY15
Q2FY14
VAR [%]
Q1FY15
VAR [%]
Net Sales
89303.2
77757.9
14.8
91644.2
-2.6
Total Expenditure
55350.9
46866.9
18.1
59707.0
-7.3
Raw Material Consumed
27927.2
25704.5
8.6
26606.2
5.0
Stock Adjustment
Finished Goods Purchased
Employee Expenses
Other Expenses
Operating Profit
Other Income
PBIDT
Interest
PBDT
Depreciation
PBT
Tax (incl. FBT & DT)
1234.5
6389.9
3978.7
15820.6
32373.2
4496.4
38448.7
183.9
38264.8
2432.2
35832.6
11581
-1335.7
5415
3698.7
13384.4
29311.9
3329.3
34220.3
-326.7
34547.0
2208.7
32338.3
10033
-192.4
18.0
7.6
18.2
10.4
35.1
12.4
-156.3
10.8
10.1
10.8
15.4
-6038.6
19208
5086.6
14844.8
31937.2
3184.2
35121.4
151.5
34969.9
2313.2
32656.7
10792.8
-120.4
-66.7
-21.8
6.6
1.4
41.2
9.5
21.4
9.4
5.1
9.7
7.3
Reported PAT
24251.6
22305.3
8.7
21863.9
10.9
Extra-ord Items
Adjusted PAT
EPS
Equity
Face Value
OPM (%)
PATM (%)
0
24251.6
3.0
7974.3
1.0
36.25
27.16
1329.5
20975.8
2.6
7920.0
1.0
37.70
26.98
-100.0
15.6
14.8
0.7
0.0
-3.8
0.7
0
21863.9
2.7
7955
1
34.85
23.86
10.9
10.7
0.2
0.0
4.0
13.8
Remarks
Y-o-Y growth was driven by Cigarettes & Agri business (which grew by 14.2% & 16.1% Y-o-Y
respectively). Cigarettes volumes declined by ~3-4%. FMCG business witnessed moderation in
growth, which stood at 11.9% (though slightly better than Y-o-Y growth in Q1FY15).
Paperboard & Packaging and Hotels grew in single digits by 8.9% & 5.9% Y-o-Y respectively.
Material Cost / Net Sales (including stock adjustment & finished goods purchased) increased
by 151 bps Y-o-Y, but fell by 359 bps Q-o-Q.to 39.8% in Q2FY15.
The effective tax rate on PBT increased by 129 bps Y-o-Y, but fell by 73 bps Q-o-Q to 32.3%
Reported PAT grew by 8.7% Y-o-Y, impacted by higher tax and absence of one off gains (in
Q2FY14, ITC reported one off gains of Rs. 1579.1 mn pertaining to write back of liability for
earlier years towards rates & taxes no longer required)
Y-o-Y Adjusted PAT growth was aided by higher other income
Y-o-Y margin contraction was on account of higher material cost & other expenses.
(Source: Company, HDFC Sec)
Segmental Results:
(Rs. in Million)
Particulars
Revenue (Net)
Q2FY15
Q2FY14
VAR [%]
Q1FY15
VAR [%]
FMCG Cigarettes
42508.6
37238.1
14.2
42010.6
1.2
RETAIL RESEARCH
Remarks
The volumes declined by ~3-4% due to steep price hikes undertaken by the company
(following 22% weighted average increase in excise duty and VAT changes in few
Page | 2
FMCG Others
21960.1
19622.2
11.9
19346.1
13.5
Paper Boards, Paper &
Packaging
12840.7
11787.4
8.9
12884.8
-0.3
Agri Business
20586.7
17724.6
16.1
32960.6
-37.5
2615.9
100512.0
11208.8
89303.2
2469.7
88842.0
11084.1
77757.9
5.9
13.1
1.1
14.8
2486.9
109689.0
18044.8
91644.2
5.2
-8.4
-37.9
-2.6
28820.6
25696.1
12.2
27217.5
5.9
-103.1
-126.9
-18.8
-155.9
-33.9
2421.4
2207.6
9.7
2749
-11.9
2982.5
2845.9
4.8
2024.5
47.3
Hotels
Total
Less: Inter Segment Revenue
Net sales/inc. from Operations
Segment Results
FMCG Cigarettes
FMCG Others
Paper Boards, Paper &
Packaging
Agri Business
Hotels
-95.8
87.2
-209.9
-120.9
-20.8
34025.6
-183.9
30709.9
326.7
10.8
-156.3
31714.2
-151.5
7.3
21.4
1990.9
1301.7
52.9
1094.0
82.0
35832.6
32338.3
10.8
32656.7
9.7
Net EBITM (%)
FMCG – cigarettes
FMCG - others
67.8
-0.5
64.8
-0.6
bps
304
18
64.8
-0.8
bps
301
34
Paperboards, paper & packaging
18.9
18.7
13
21.3
-248
Agri-business
14.5
16.1
-157
6.1
835
Total
Interest
Other un-allocable expenditure
net off un-allocable income
Total Profit Before Tax
RETAIL RESEARCH
states). Volume decline was broad‐based and across segments like 64mm, RSFT and
KSFT. It was the sixth straight quarter of volume decline. However, price hikes
supported the overall value growth.
FMCG business witnessed moderation in growth (though better than growth reported
in Q1FY15), impacted by slowdown in consumption expenditure and high base of last
year. However, despite slowdown, ITC was able to gain market share across categories,
which was encouraging. Strong uptick was reported in growth of Aashirvaad Atta, and
launch of 'Sunfeast Mom's Magic' range of cookies.
Growth was driven by higher capacity utilization & operating efficiencies, improvement
in product mix and scale-up of Cartons and Flexibles packaging business.
Robust Y-o-Y & Q-o-Q growth in Agri Business revenues was driven by trading
opportunities in wheat, soya and coffee.
Growth was subdued, impacted by weak economic conditions and pricing environment.
The segment managed to reduce its losses at PBIT level. Higher input cost curtailed the
margin expansion in the segment.
The segment reported loss during the quarter due to change in the depreciation policy
(additional depreciation charge of Rs. 134 mn due to revision in useful life of fixed
assets in accordance with Companies Act, 2013). Adjusted for this, the business
reported marginal profit of Rs. 38.2 mn in Q2FY15
Margin expansion on Y-o-Y & Q-o-Q basis was driven by steep price hikes.
The Y-o-Y improvement (though marginal) in margin was encouraging, led by improved
mix and higher utilization. However, input prices, particularly that of wood, remained at
elevated levels during the quarter
Segment margins declined due to deterioration in mix and lower leaf tobacco sales.
Page | 3
Hotels
Total
Capital Employed
FMCG Cigarettes
FMCG Others
Paper Boards, Paper &
Packaging
Agri Business
Hotels
Total Capital Employed
-3.7
33.9
3.5
34.6
-719
-71
-4.9
28.9
120
494
56618
39632.8
46636.1
31624
21.4
25.3
50874.6
39417.4
11.3
0.5
55225.5
50688
9.0
54540.9
1.3
16777.3
37058.4
205312.0
11199
35138.2
175285.3
49.8
5.5
17.1
22990.3
36484.6
204307.8
-27.0
1.6
0.5
(Source: Company, HDFC Sec)
Other highlights / developments:




In FMCG business, amidst a sluggish consumer demand environment, the Branded Packaged Foods Businesses recorded further improvement in market standing
during the quarter growing well ahead of the industry across most categories. In the Staples, Spices and Ready-to-Eat Foods Business, ‘Aashirvaad’ atta recorded
robust growth driven by premium variants and the ‘Select’ offering which continues to gain impressive consumer franchise. The Bakery and Confectionery Foods
business launched the ‘Sunfeast Mom’s Magic’ range of premium cookies in two variants, ‘Cashew & Almond’ and ‘Rich Butter’. The Business also forayed into the
Chewing Gums segment with the launch of ‘GumOn’ in select markets. The products have met with favourable consumer response and are being rolled out to target
markets.
In the Snack Foods Business, ‘Bingo!’ registered robust growth driven by the finger snacks portfolio comprising the ‘Mad Angles’, ‘Tedhe Medhe’, ‘Tangles’ and
‘Galata Masti’ sub-brands. The recently launched 'Original Style' variants of Bingo! Yumitos potato chips also gained good traction during the quarter. In the Instant
Noodles and Pasta categories, ‘Sunfeast YiPPee!’ sustained its high growth trajectory and enhanced market standing.
During the quarter, the Personal Care Products Business augmented its product range in the Deodorants category with the launch of ‘Engage’ Cologne in six variants
- 3 each for men and women. In the Personal Wash category, the Business expanded its presence in the fast-growing male grooming segment with the introduction
of several new variants of Gel Bathing Bars, Shower Gels and Face Wash under the 'Fiama Di Wills' brand. These products have received encouraging consumer
response and are being extended to target markets.
The Scheme of Arrangement between Wimco Limited (‘Wimco’) and the Company became effective on 27th June, 2014 on filing of the Order of the Hon’ble High
Court with the respective Registrar of Companies. The Scheme, with effect from 1st April 2013, provided for the demerger of the Non Engineering Business of
Wimco into the Company. The results for the quarter ended 30th June, 2014 & 30th September, 2014 and for the six months ended 30th September 2014 reflect the
effect of the Scheme and consequently, the figures for the previous periods are not strictly comparable.
Conclusion & Recommendation:
ITC’s Q2FY15 results (Y-o-Y) were more or less in line with our estimates. Cigarettes volumes declined for sixth straight quarter by ~3-4%. However, this was on expected
lines. Steep price hikes initiated supported the overall growth, which remained in high double digits. Growth in the FMCG business continued to moderate (on expected
lines), impacted by slowdown in consumption expenditure. Rise in Agri business revenue growth was driven by trading opportunities in wheat, soya and coffee. Growth in
RETAIL RESEARCH
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Paperboard & Packaging was below our expectations, but still decent, while Hotels continued to disappoint with a mid single digit revenue growth. We were disappointed
with the overall margin contraction on Y-o-Y basis (impacted by input cost inflation & relatively higher other expenses). Margin expansion (Y-o-Y) in Cigarettes (led by
price hikes) & Paperboard & Packaging was encouraging (led by improved mix and higher utilization). While FMCG business managed to lower its losses, we expected
better performance from the segment on profit front (higher material cost restricted margin expansion in the segment).
In the recently held FY15 Union Budget, the government hiked the excise duty on cigarettes by 11-72% (72% on cigarettes of length not exceeding 65 mm and to 11-21%
hike for cigarettes of other lengths). For ITC, weightage average hike was ~22%. To neutralize this impact, ITC undertook steep price hikes over the last few months, which
impacted its volume growth in Q2. It is important to note that the cigarette prices have increased by ~40% in the past 18 months which has impacted the offtake over the last few
quarters. While price hikes would continue to support the overall value growth & margins, volume growth is likely to decline in near term. Further steep hikes in excise
duty (in next budget) could put more pressure on the volumes in the coming quarters.
Non-Cigarettes FMCG business has been clearly witnessing moderation in revenue growth over the last few quarters, in line with the industry slowdown. We expect this
to persist in near term. However, we expect some recovery in FY15 & meaningful recovery in FY16, as we expect the economic growth & spending power to improve. The
segment has managed to breakeven at EBIT level during FY14. However, in H1FY15, the segment has reported losses (though these have reduced over H1FY14). We feel
the segment is taking longer to become profitable than the company expectations. We expect a gradual improvement on the profit front, since we feel the company is
still scaling up the business rapidly and focusing on market share gains. Packaged foods, personal care and stationery businesses would be the key growth drivers of the
business growth going forward.
We feel the hotel business revenue growth could continue to remain subdued until there is a meaningful improvement in domestic travel & tourism industry, which could
be possible only if the global environment improves. As regards the Agri business, the growth in revenue & profits would improve due to scaling up of operations at the
recently commissioned state-of-the art green leaf tobacco threshing plant in Mysore, resulting in better quality and supply chain efficiencies. The Paperboard &
Packaging Business has made marginal progress during the quarter towards scaling up its in-house pulp manufacturing capacity at the Bhadrachalam unit. The project is
expected to be commissioned in Q3FY15. This will help in improving the business profits in FY16.
We feel ITC is on track to meet our FY15 & FY16 estimates. Hence we are keeping them unchanged. At CMP, the stock trades at 24.5xFY16, which is at a discount of 2030% to its FMCG peers. The discount has widened over the last few quarters (compared to historical discount of 12-13%) on the back of cigarettes industry being taxed
heavily (over the last two years) due to increasing health issues due to smoking. In The Union Health Ministry recently issued a notification making it mandatory for
cigarette manufacturing companies to carry statutory warning against smoking on both sides of a cigarette pack and covering at least 85% of the packaging. Further, an
expert panel set up by the health ministry has proposed measures like ban on sale of loose cigarettes, raising the age limit for consumption and increasing the fine for
smoking in public spaces. If accepted, these suggestions on curbing tobacco consumption could soon be part of tougher legislation being drafted by the Modi
government, which it wants to introduce in the Parliament. The current discount in the stock price is reflecting these concerns.
In the last five years, the stock price is not fallen significantly below 23.5x, while it has not traded much above 31-31.5x its one year forward PE. While the downside in
the stock price is limited from current levels, a sharp rerating is unlikely to happen until we see a meaningful recovery in the cigarettes volume growth and FMCG &
Hotels business. The company still relies heavily on its cigarettes business for revenue & profit growth (40% of total revenues & 85% of total PBIT). For ITC to gain benefits
in terms of volume growth in cigarettes business and improvement in valuations, its competing products (bidis) should be taxed heavily in the coming years.
RETAIL RESEARCH
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Currently the pessimism is at its peak. Hence if the negatives (pertaining to cigarettes business) do not play out to the extent anticipated in the next 1-2 quarters, then the
stock could be re-rated.
We are maintaining our price target at Rs. 377 (valuing the stock at 26xFY16E EPS). We feel investors could buy this stock at current levels and add it on dips to Rs. 326341 (22.5-23.5xFY16E EPS) band for our price target over the next quarter.
Financial Estimations:
(Rs. in Million)
Particulars
Net Sales
Operating Profit
Net Profit
Equity
EPS (Rs.)
OPM (%)
PATM (%)
PE
FY11
211675.8
71213.1
49876.1
7738.1
6.4
33.6
23.6
55.2
FY12
247984.3
84995.9
61623.7
7818.4
7.9
34.3
24.8
45.1
FY13
296055.8
103324.2
74183.9
7901.8
9.4
34.9
25.1
37.9
FY14
328825.6
119408.9
86522.61
7953.2
10.9
36.3
26.3
32.7
FY15E
378004.1
137593.5
99037.1
7955.0
12.4
36.4
26.2
28.6
FY16E
438484.8
160485.4
115321.5
7955.0
14.5
36.6
26.3
24.5
(Source: Company, HDFC Sec Estimates)
Analyst: Mehernosh K. Panthaki – IT, FMCG & Midcaps; Email ID: [email protected]
RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office
HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022)
2496 5066 Website: www.hdfcsec.com Email: [email protected]
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others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or
complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment
banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients
RETAIL RESEARCH
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