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Monday, October 27, 2008

ITC - FMCG Giant - Results Analysis - Buy Recommendation

Recommendation: Buy
Price target: Rs247
Current market price: Rs159

Q2FY2009 results: First-cut analysis
Result highlights

Q2FY2009 results of ITC were marginally ahead of our expectations. The top line achieved a robust growth of 16.4% year on year (yoy) to Rs3,862.7 crore (in line with our expectation of Rs3,815.7 crore) on account of strong revenue growth in the cigarette and paper boards, paper & packaging businesses.
The operating profit margin (OPM) contracted by 109 basis points yoy to 31.5% during the quarter. The OPM fell mainly because of a 401-basis-point surge in the other expenses as a percentage to sales and a 35.8% year-on-year (y-o-y) growth in the employee expenses. However a 380-basis-point decline in the raw material cost as a percentage to sales has prevented a steeper decline in the OPM. Thus the operating profit grew by 12.5% to Rs1,215.4 crore during the quarter.
However a 31% y-o-y drop in the other income led to measly 4.1% growth in the adjusted net profit to Rs802.7 crore (ahead of our expectation of Rs779.4 crore).
The net revenues of the cigarette business registered a healthy growth of 15.1% to Rs1,812.1crore during the quarter. We believe the growth in the cigarette revenues is on account of the price hikes implemented across the portfolio and due to substantial up-gradation of the non-filter cigarette smokers to filter cigarettes, which restricted the de-growth in volumes. The profit before interest and tax (PBIT) margin of the cigarette business improved by 135 basis points yoy to 27.8% during the quarter.
On the other hand the non-cigarette fast moving consumer goods business registered a below-par revenue growth of 29.8% for the quarter. The segmental loss increased to Rs116.6 crore in Q2FY2009 (a margin loss of 15.3%) as against Rs36.5 crore in Q2FY2008 primarily due to spends on building scale in the newly-launched personal care product category and due to overall input cost inflation.
We believe the cigarette business has performed satisfactorily in H1FY2009 considering the fact that the company has exited from the non-filter cigarette business. However the government’s measures to curb cigarette consumption (such as ban on cigarette smoking in public places and carrying pictorial warnings on cigarette packs) does not augur well for ITC’s cigarette business.
At the current market price of Rs159 the stock trades at 16.8x its FY2009E earnings of Rs9.5 and 14.0x FY2010E earnings of Rs11.4. We maintain our Buy recommendation on the stock. We shall come up with a detailed update after an interaction with the management.

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