ITC Ltd results were in line with our estimates. Net sales, Ebitda and PAT grew 12%, 18% and 18%, respectively.
Key positives: (i) cigarette PBIT (profit before interest and tax) rose 21% as costs remained muted; and (ii) other FMCG posted a profit for the first time in FY14.
Key negatives: (i) cigarette volume declined for the fourth successive quarter, down 3% year-on-year; and (ii) paper margin fell 268 basis points y-o-y to 14%, the lowest in nine years.
In staples, ITC remains best placed to deliver mid-to-high teens EPS (earnings per share) growth. Maintain Outperform with a new price target of R385.
Cigarettes: volume yet to improve but profit growth strong. Sharp price hikes amid macro weakness led to cigarette volume declining 3% in 9MFY14. The trend continued in Q4FY14, with volume declining 3% y-o-y, as prices of brands such as Bristol, Navy Cut and Gold Flake 64mm rose in January 2014. On a muted 1.1% increase in costs, cigarette PBIT grew a strong 21% y-o-y. Contribution from the 64mm segment now stands at 12-13%.
Non-cigarette business: hotels and other FMCG shine. Non-cigarette PBIT grew 18.6% y-o-y, versus a growth of 5% in 9MFY14.
FMCG sales growth continued to be moderate at 13.6%. Segment profit increased sharply to
R431m. On an annual basis, the segment reported a profit for the first time in FY14.
Agri sales grew only 8% on a high base (31% growth in 4Q13), with a healthy 14% PBIT growth (margin up 38bps y-o-y to 7.3%).
Sales in hotels showed a muted growth of 1.6%, but lower costs led to a healthy 47.3% growth in PBIT.
Paper net sales grew a strong 19.2% on capacity expansion and price increases. PBIT remained flat as margins declined 268bps
y-o-y to 14%, the lowest in the
past nine years.
Best placed within consumer staples. Strong performance in a weak environment reinforces ITC?s earnings growth resilience. We expect demand for staples to recover only in FY16 and a poor monsoon could worsen demand further. Hence, within staples, ITC is best placed to deliver mid- to high-teens EPS growth. Therefore, while we remain underweight on the sector, ITC remains our top large-cap pick. At 23x FY16e PER (price-to-earnings ratio) , the stock is the cheapest among its peers. We reiterate Outperform with a 12-month PT (price target) of R385 (from R 370), based on 26x forward PER.
?Standard Chartered Bank
