Impressive results, but limited upside to valuation
Q4 results summary: Top-line growth of 19.2% year-on-year to R81.8 billion and profit after tax growth of 19.4% y-o-y to R19.3 bn were both 1.5% higher than consensus. Cigarette Ebit (earnings before interest and taxes) margin, on net revenues, expanded by 421bp y-o-y, reflecting the positive impact of price increases (18% average price hikes were taken in FY13). ITC has maintained a strong double-digit earnings growth of 20% over the last 15 quarters and this quarters results further underscore the earnings resilience theme which is a core part of ITCs investment thesis
In the cigarette segment, net sales grew 11.5% y-o-y while Ebit growth came in at an impressive 20.2% considering the new excise tax (up +21%) was applicable in the whole of March and new cigarette prices were effective only from the first week of April. Even though volume growth in excess of 3% was impressive, in our view, it could be due to some overstocking as well, which could potentially reverse in Q1FY14; however, ITC maintains that this effect is unlikely to be pronounced.
In Other FMCG, net sales growth of +26% y-o-y was 0.6% higher than our estimate, as packaged food, personal care, education & stationary products registered impressive growth across various sub-categories, reflecting the benefits of market share gain and increased prominence in categories of its presence. Moreover, the segment became Ebit positive for the first time, ahead of our expectation that it would become profitable in FY14e, as Ebit margin improved by 161 basis points to 0.6%. ITC appears on track to become Ebit positive in FY14e on a full-year basis. We estimate the Other FMCG Ebit contribution to the group will increase from -0.8% in FY13 to 4.5% in FY18e.
In the Hotels segment, net sales increased 10.4% y-o-y and margins collapsed to 12.9%, reflecting the ongoing adverse impact of tough macroeconomic conditions and increased room supply in major Indian cities. We expect FY14e should benefit from a favourable base effect and +17% additions in room capacity owing to the launch of ITC Grand Chola, which should help the top line going forward, though margins may remain under pressure in the short-term.
In Agribusiness, top-line growth of 31%, which got a boost from leaf tobacco exports, was much better than expectation but came at the expense of lower margins due to a change in mix. Nonetheless Ebit growth was marginally better than our estimates.
In the paperboard and paper segment, top-line growth was 7.9% and was helped by higher volume and improved mix. But significant cost inflation, primarily in wood, coal and chemical costs, adversely impacted segment margin which declined by 219bp y-o-y to 17.8%.
Revised estimates: We have marginally revised our estimates post-FY13 results, which were better than our estimates. We have increased FY14e and FY15e earning estimates by 1.4% and 1.8% respectively.
Valuation and risks: We value ITC on a SOTP (sum-of-the-parts) basis, which is based on a DCF (discounted cash flow) valuation of the cigarette business. Hotels, agri, Other FMCG, and P&PB business are valued using a relative valuation approach. Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppt (percentage point) above and below the hurdle rate for Indian stocks of 11%. Our new target price of R365 implies a potential return of 9%, which is within the Neutral band. Thus, we downgrade our rating to Neutral. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
