First cut on ITC by Kotak
*KOTAK : FIRST CUT ON ITC*
· Overall results – After 5 quarters of single-digit topline and EBITDA growth, ITC reported a robust quarter with double-digit revenue/EBITDA growth (both a tad above our estimates); revenues up 10% yoy to Rs100.6 bn (KIE: Rs98.2 bn), EBITDA up 14% yoy to Rs35.8 bn (KIE: Rs34.5 bn), PBT up 14% yoy to Rs38.3 bn (KIE: Rs37.3 bn), net profit up 6% yoy at Rs24.9 bn (KIE: Rs24.9 bn) and EPS at Rs3.1/share. PAT growth was dragged by a sharp 540 bps jump in ETR. For FY2016, ITC reported revenue, EBITDA and PAT growth of 1%, 6% and 2% respectively; recurring EPS stood at Rs12.2/share.
· Cigarettes – net revenues up 10% yoy (7% above our estimates) and EBIT up 12% yoy (highest since 3QFY14, 4% above our estimates). Cigarette volumes were flattish yoy (better than our estimate of 2% decline) partly aided by low base. However sequential improvement in growth trajectory (3QFY16 volumes had declined 4% yoy) indicates sharp price hikes over the last two years have largely been absorbed. Cigarette EBIT margins (at net level) expanded 80 bps yoy to 65.1% (190 bps below our estimates); non-excise costs in cigarette segment went up 7.7% yoy in 4QFY16. For FY2016, cigarette business posted 4% net revenue growth (all price-led; volumes declined 9-10% yoy) and 5% EBIT growth yoy. Other highlights – (1) DSFT segment now contributes 18-20% of ITC’s cigarette volumes (up from 12-13% in FY2015) and (2) RSFT segment remains the key pain point for ITC (impacted by jump in illicit cigarette volumes); KSFT volumes trajectory improved sequentially.
· Other FMCG – another weak quarter with 5% yoy revenue growth (3% below our estimates); dragged by still-weak demand, price deflation and trade pipeline synchronization in the notebooks business. On the positive side, ITC posted Rs708 mn positive –significantly better versus our expectation as EBIT margins expanded 70 bps yoy to 2.6%. For FY2016, FMCG business reported 8% revenue growth and EBIT doubled to Rs705 mn.
· Hotels – revenue growth remained subdued at 5% yoy and profitability remains weak partly on account of heavy investments into new properties; EBIT grew 1% yoy and EBIT margin fell 40 bps yoy.
· Agri business – revenues inched up 27% yoy significantly ahead of our estimates; however, EBIT grew just 6% yoy (8% below our estimates) due to 190 bps yoy contraction in EBIT margins on account of weaker mix. We note agri-business revenues/margins tend to be volatile on a quarterly basis based on export opportunities available during the quarter (this quarter benefited from opportunities in wheat and tobacco); hence, we won’t read too much into the miss/beat in agri-business performance.
· Paperboards and packaging – Paperboards business posted another weak quarter with 3% yoy revenue growth (impacted by slowdown in FMCG and competition from cheap imports from China) and 7% yoy EBIT growth – both below estimates. EBIT margins expanded 50 bps yoy aided by lower input costs.
· Overall view – Robust performance of cigarette business in 4QFY16 (ahead of our estimates) is likely to drive upgrade to our estimates. With a relatively lower excise hike in this year’s budget and staggered price hikes taken by ITC (has taken selective hikes in KSFT and DSFT portfolio), we expect volume trajectory for ITC’s cigarette business to improve and inch up to marginally positive territory. We continue to see value in the stock, taxation-related risks (sin tax in GST?) notwithstanding. We have a BUY rating on the stock.
· We note ITC has – (1) declared a dividend of Rs8.5/share (including Rs2 special dividend) for FY2016; this equates to a 3% dividend yield at CMP and (2) it has declined a bonus share issues in proportion of 1:2.
· Overall results – After 5 quarters of single-digit topline and EBITDA growth, ITC reported a robust quarter with double-digit revenue/EBITDA growth (both a tad above our estimates); revenues up 10% yoy to Rs100.6 bn (KIE: Rs98.2 bn), EBITDA up 14% yoy to Rs35.8 bn (KIE: Rs34.5 bn), PBT up 14% yoy to Rs38.3 bn (KIE: Rs37.3 bn), net profit up 6% yoy at Rs24.9 bn (KIE: Rs24.9 bn) and EPS at Rs3.1/share. PAT growth was dragged by a sharp 540 bps jump in ETR. For FY2016, ITC reported revenue, EBITDA and PAT growth of 1%, 6% and 2% respectively; recurring EPS stood at Rs12.2/share.
· Cigarettes – net revenues up 10% yoy (7% above our estimates) and EBIT up 12% yoy (highest since 3QFY14, 4% above our estimates). Cigarette volumes were flattish yoy (better than our estimate of 2% decline) partly aided by low base. However sequential improvement in growth trajectory (3QFY16 volumes had declined 4% yoy) indicates sharp price hikes over the last two years have largely been absorbed. Cigarette EBIT margins (at net level) expanded 80 bps yoy to 65.1% (190 bps below our estimates); non-excise costs in cigarette segment went up 7.7% yoy in 4QFY16. For FY2016, cigarette business posted 4% net revenue growth (all price-led; volumes declined 9-10% yoy) and 5% EBIT growth yoy. Other highlights – (1) DSFT segment now contributes 18-20% of ITC’s cigarette volumes (up from 12-13% in FY2015) and (2) RSFT segment remains the key pain point for ITC (impacted by jump in illicit cigarette volumes); KSFT volumes trajectory improved sequentially.
· Other FMCG – another weak quarter with 5% yoy revenue growth (3% below our estimates); dragged by still-weak demand, price deflation and trade pipeline synchronization in the notebooks business. On the positive side, ITC posted Rs708 mn positive –significantly better versus our expectation as EBIT margins expanded 70 bps yoy to 2.6%. For FY2016, FMCG business reported 8% revenue growth and EBIT doubled to Rs705 mn.
· Hotels – revenue growth remained subdued at 5% yoy and profitability remains weak partly on account of heavy investments into new properties; EBIT grew 1% yoy and EBIT margin fell 40 bps yoy.
· Agri business – revenues inched up 27% yoy significantly ahead of our estimates; however, EBIT grew just 6% yoy (8% below our estimates) due to 190 bps yoy contraction in EBIT margins on account of weaker mix. We note agri-business revenues/margins tend to be volatile on a quarterly basis based on export opportunities available during the quarter (this quarter benefited from opportunities in wheat and tobacco); hence, we won’t read too much into the miss/beat in agri-business performance.
· Paperboards and packaging – Paperboards business posted another weak quarter with 3% yoy revenue growth (impacted by slowdown in FMCG and competition from cheap imports from China) and 7% yoy EBIT growth – both below estimates. EBIT margins expanded 50 bps yoy aided by lower input costs.
· Overall view – Robust performance of cigarette business in 4QFY16 (ahead of our estimates) is likely to drive upgrade to our estimates. With a relatively lower excise hike in this year’s budget and staggered price hikes taken by ITC (has taken selective hikes in KSFT and DSFT portfolio), we expect volume trajectory for ITC’s cigarette business to improve and inch up to marginally positive territory. We continue to see value in the stock, taxation-related risks (sin tax in GST?) notwithstanding. We have a BUY rating on the stock.
· We note ITC has – (1) declared a dividend of Rs8.5/share (including Rs2 special dividend) for FY2016; this equates to a 3% dividend yield at CMP and (2) it has declined a bonus share issues in proportion of 1:2.
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