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CLSA Research is bullish on ITC and has maintained buy rating on the stock with a target of Rs 200.

Tuesday, July 31, 2007

The company’s Q1 FY08 earnings growth of 20%, YoY was 5% ahead of research firm estimates due to better performance on cigarette margins.

ITC’s 1QFY08 earnings growth of 20% YoY was 5% ahead of our estimates led by better than expected cigarette realisation and margins. We have raised our earnings estimates by 4-7% and target by 8% to Rs 200 per share, reflecting more confidence in the cigarette business growth and margins. While the lacklustre performance in the non-cigarette business may have disappointed some, we believe that these results convincingly signal the end of the derating of ITC. Maintain BUY.

1QFY08 results ahead of expectations

ITC’s 1QFY08 profits grew 20% YoY – 5% ahead of our revised expectations, due to better performance on cigarette margins. Ebitda grew by 16% YoY – driven by a 15% growth in cigarette business ebit. While the quarter does not include the full impact of additional VAT, it captures more than 90% of the impact in terms of taxes, and thus, strong 1QFY08 results significantly ease concerns on the VAT impact.

Robust performance from cigarette business

Cigarette revenues during 1QFY08 (gross of VAT) are up 21.2% YoY and by 8.9% YoY, net of VAT. Cigarette business ebit margins improved by 150bps YoY as the company had effected a 20%+ weighted average increase in cigarette prices. Cigarette volumes dropped by an estimated 2% YoY due to the steep price hikes, warranted by a 12.5% levy of VAT. We expect the cigarette volumes will drop further as the full impact of the price hike sets in. The weighted average realisations increased by 9-10% YoY indicating that the much anticipated consumer down trading hasn’t happened to a large extent.

Non-cigarette businesses performance lacklustre

New FMCG business continued to show a strong topline (50% YoY and 9% QoQ) but the losses continued at Rs 446 million, 10% lower than 4QFY07 and down 23% YoY despite the ramp-up of ‘Bingo’. The hotel business ebit grew by only 11.7% YoY on flat margins. Paperboards revenues grew by a 5% YoY while the margins declined by 440bps YoY as the company had taken a planned shut down at its Bhadrachalam unit.

Raised target price to Rs 200 per share

We have raised our earnings estimates by 4-7% as on the back of better than expected cigarette margin performance. Earnings upgrade coupled with more confidence on the resilience of the cigarette business, we have also raised out target price by 8% to Rs 200 per share. While more hikes in VAT rates by other states remains the key risk, the favourable consumer / company response to this current raise from 0-12.5% makes us sanguine on the future outlook.

Posted by FR at 2:57 AM  


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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.