{LONGTERMINVESTORS} ITC (ITC IN) - Cigarette volume growth in green for 2nd consecutive quarter

 

Dear all,

Cigarette volume growth in green for 2^nd consecutive quarter

·         Revenue (excl. excise duty) grew by 8% YoY (+2.7% QoQ) to INR 136.2bn (as per Ind AS, excise duty must not be netted off from the revenue, instead should be included in COGS); Cigarette business grew by 7.1% YoY to INR 85.3bn and we estimate the volume growth to be ~4%, while cigarette EBIT grew 8.4% YoY to INR 32.2bn. Cigarette's EBIT margin expanded by 40bps YoY to 37.7%.

·         Non cigarette FMCG business grew 13.3% YoY (+12% QoQ) to INR 26.72bn amidst deflationary pricing environment; EBIT loss narrowed down to INR 32.6mn in 2QFY17 compared to a loss of INR 111mn in 2QFY16; The higher gestation cost for new launches and investment in brand building has largely offset the benefit of favorable product mix and benign input cost. Company launched several products in 1HFY17 such as, Aashirvaad Sugar Release Control Atta, Delishus Expressions, Fabelle, etc.

Valuation: Although regulatory overhang persists on the cigarette business, we are positive on the long term fundamentals of the cigarette business, coupled with market share gains in the other FMCG business, re-launch of fruit juice brand and launch of dairy products augurs well for ITC. At CMP, ITC trades at an attractive valuation of 26.7 and 23.8X to FY17E and FY18E EPS and we believe the current valuation discounts the regulatory overhangs. We assign a target P/E of 26.5X on FY18E consensus earnings, to arrive at a target price of INR 270 and assign an OUTPERFORMER rating.

Risks: Adverse Raw material, currency movement, continuous increase in the sin tax will hamper demand for cigarette in the organized segment.

 

 

Regards,

CSEC Research

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