ICICI Direct- ITC- Slowdown trickles down to revenues GÇª

7/27/2019 ICICI Direct- ITC- Slowdown trickles down to revenues G

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July 26, 2013

ICICI Securities Ltd|Retail Equity Research

Result Update

WHATS CHANGEDPRICE TARGET .................................................................................................... Unchanged

EPS (FY14E) ......................................................................... Changed from | 11.5 to | 11.0

EPS (FY15E) ........................................................................................................ Unchanged

RATING............................................................................................................... Unchanged

Slowdown trickles down to revenuesITC reported disappointing Q1FY14 results with 10.3 YoY sales growth.The lower sales growth was on the back of slowing YoY growth incigarettes & FMCG business at 13.5 & 18.3 , respectively. We believethe aggressive price hikes in cigarettes (14-20 post budget and VAThikes) have taken a toll on volumes (1-2 de-growth) during the quarter.The slowdown in FMCG revenues was on the back of the tough economicscenario. Hotels, paper & paperboards and agri business posted modestgrowth (YoY) of 7.5 , 11.8 and 29.4 , respectively. Led by priceincreases & premiumisation in cigarettes, margins zoomed higher by 243bps YoY to 38 . We believe sales growth would remain grim in FY14Edue to the slowdown in the economy and revive only by FY15E. Further,with ITC being the market leader in cigarettes, pricing power in cigaretteswould continue to drive higher margins, though cigarette volume growthwill be impacted (-2 in FY14E and 1 in FY15E). We maintain a HOLDrating considering the near term slowdown in growth.De-growth in cigarette volumes witnessed after FY11After two years of positive volume growth, ITC seems to trending towardsde-growth in cigarette volumes in Q1FY14 and FY14E. We expect de-

growth of 2% in FY14E on the back of two rounds of price increases

already during the year (14-20% post Budget in April, 2013 and 5-8% in

July, 2013).

FMCG to break-even in FY14FMCG losses have been on a declining trend, with losses during the

quarter decreasing to | 18.9 crore against | 38.8 crore in Q1FY13. With

the continuous improvement in FMCG performance, we expect it to

achieve breakeven by FY14E itself and contribute positively to margins

from FY15E. However, we expect sales growth in FMCG to moderate to

20% CAGR in FY13-15E against 23% CAGR during FY08-13.

Valuations at uncomfortable zoneWe expect overall sales growth to moderate to 13.7% CAGR during FY13-

15E from 16.2% during FY08-13. Considering the demand slowdown, 27x

FY15E valuation multiples are expensive. We maintain our HOLD ratingon the stock with a target price of | 328.Exhibit 1:Financial Performance(| Crore) Q1FY14E Q1FY14E Q1FY13 Q4FY13 QoQ (Chg %) YoY (Chg %)

Net Sales 7338.5 7888.7 6652.2 8180.3 -10.3 10.3

EBITDA 2791.3 2828.2 2368.3 2706.3 3.1 17.9

EBITDA Margin (%) 38.0 35.4 35.6 33.1 495 bps 243 bps

Depreciation 217.8 217.8 194.8 206.7 5.4 11.8

Interest 17.0 19.3 13.8 24.3 -30.2 23.2

Other Income 203.2 176.5 176.8 254.0 (20.0) 14.9

Reported PAT 1888.8 1937.3 1602.1 1928.0 -2.0 17.9EPS (|) 2.4 2.5 2.0 2.4 -2.0 16.7 Source: Company, ICICIdirect.com Research

ITC Limited (ITC)

| 359

ting matrix

ing : Hold

get : | 328

get Period : 12 months

ential Upside : -9%

y Financials

Crore FY12 FY13 FY14E FY15E

et Sales 24,798 29,605.6 33,328.9 38,296.3

BITDA 8,848.6 10,620.7 12,687.7 14,573.6

et Profit 6,162.4 7,418.4 8,696.7 10,477.8

PS (Rs) 7.9 9.4 11.0 13.2

luation summary

FY12 FY13 FY14E FY15E

E 45.5 38.2 32.6 27.1

arget P/E 40.7 34.1 29.1 24.2

vidend yield 1.3 1.5 1.7 2.1

ice/Sales 11.4 9.6 8.5 7.4oNW 32.8 33.6 34.5 36.4

oCE 42.9 44.1 46.5 47.1

oA 31.0 31.6 32.7 34.7

ock data

arket Capitalization 283,674.6

otal Debt (FY12) 184.4

sh and Investments (FY12) 2,818.7

281,040.4

week H/L 298 / 192

uity capital 790.2

ce value | 1

F Holding (%) 33.5

Holding (%) 19.7

ce movement

100

150

200

250

300

350

400

Jul-13May-13Jan-13Nov-12Aug-12

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

Price (R.H.S) Nifty (L.H.S)

alysts name

anjay Manyal

[email protected]

arineeta Poddar

[email protected]


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ICICI Securities Ltd|Retail Equity Research Page 2

Exhibit 2:AssumptionParticulars FY11 FY12 FY13E FY14E FY15E

Cigarettes

Volumes (in m illion sticks) 81723 85360 87308 85562 86418

Volume growth(%) -2.8 2.9 2.3 -2.0 1.0

Reaslisations (| per stick) 2.4 2.5 3.0 3.4 3.8

Average Price Hike (%) 18.0 4.0 18.1 15.5 10.0

Excise duty (| crore) 9360.3 10073.4 12204.2 13890.5 15293.3

Revenues (| crore)

FMCG 4482.4 5544.6 7012.4 8324.7 10022.0

Paper & Pare Boards 3666.9 4129.8 4481.8 4980.2 5503.5

Agri business 4748.0 5695.3 7200.7 8955.2 10624.0

Hotels 1000.9 1006.3 1074.4 1141.6 1201.9 Source: Company, ICICIdirect.com Research

Exhibit 3:Cigarettes sales and EBIT (%) trend

29.9

31.731.3

32.4 32.8 31.5

29.9

32.631.5

4000

5000

6000

7000

8000

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

28

30

32

34

Cigarettes Sales (| crore ) EBIT (%)

Source: Company, ICICIdirect.com Research

Exhibit 4:Excise duty and percentage to sales

45.944.4 44.7

45.847.3 46.3

45.5

48.6

45.9

1500

1900

2300

2700

31003500

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

38

40

42

44

46

4850

Cig Excise duty (| crore) % to cig sales


Exhibit 5:FMCG revenues and margins (%) trend

1345 13751623

14791700

20431750

1789

1201

-3%-4%-6% -1% -2% -1%-3% -1%

1%-1000

-500

0

500

1000

1500

2000

2500

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

-10%

-5%

0%

5%

10%

15%

20%

25%

FMCG sales (| '000 crore) EBIT (RHS)


Exhibit 6:Hotel revenues and margins (%) trend

18.5

32.729.0

10.9

3.6

12.9

17.9

7.1

29.2

0

75

150

225

300

375

Q

1FY12

Q

2FY12

Q

3FY12

Q

4FY12

Q

1FY13

Q

2FY13

Q

3FY13

Q

4FY13

Q

1FY14

0

7

14

21

28

35

Hotels sales (| crore) -LHS EBIT (%)



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Exhibit 7:Paper revenues and margins (%) trend

22.4

27.5

21.819.0

23.9

20.2

25.216.7 20.4

0

300

600

900

1200

1500

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

0

10

20

30

Paper sales (| crore)-LHS EBIT (%)


Exhibit 8:Agri revenues and margins (%) trend

7.5

10.16.9

12.4

10.6

9.2

12.8 9.1

16.6

0

500

1000

1500

2000

2500

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

02468

1012141618

Agri sales (| crore) EBIT (%)


Exhibit 9:EBIT Contribution - Quarterly

1577 1729 1844 1758 1900 2080 2234

2112 2242

157 239224 196

171 283 229 188 252

227 290 142 106 265 260 173

128 199

-20%

0%

20%

40%

60%

80%

100%

Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14

Cigarettes FMCG Hotels Agri-Business Paperboards


Exhibit 10:Revenue contribution in Q1FY14

Cigarettes

56%

FMCG

14%

Hotels

2%

Paperboard

10%

Agri

18%


Exhibit 11:EBIT contribution in Q1FY14

Cigarettes

83%

FMCG

-1%

Hotels

0%

Paperboard

9%

Agri

7%



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Financial Performance

Exhibit 12:Profit & Loss Account(| Crore)

(Year-end March) FY12 FY13 FY14E FY15E

Total operating Income 25,173.8 29,909.2 33,328.9 38,296.3Growth (%) 18.8 11.4 14.9

Raw Material Expenses 9,632.5 12,065.8 13344.7 15431.6

Employee Expenses 1,265.4 1,391.3 1502.4 1685.0

Marketing Expenses 1,062.6 0.0 0.0 1455.3

Administrative Expenses 2,349.3 0.0 0.0 1531.9

Other expenses 2,015.4 5,831.4 6176.8 3619.0

Total Operating Expenditure 16,325.2 19,288.5 21023.9 23722.7

EBITDA 8,848.6 10,620.7 12,687.7 14,573.6

Growth (%) 20.0 19.5 14.9

Depreciation 698.5 795.6 871.3 913.4

Interest 77.9 86.5 70.9 0.0

Other Income 825.3 945.5 739.8 1277.5

PBT 8,897.5 10,684.2 12485.3 14937.6

OthersTotal Tax 2,735.2 3,265.8 3788.6 4459.8

PAT 6,162.4 7,418.4 8,696.7 10,477.8

Growth (%) 20.4 17.2 20.5

EPS (|) 7.8 9.3 11.0 13.2 Source: Company, ICICIdirect.com Research

Exhibit 13:Cash Flow Statement(| Crore)

(Year-end March) FY12 FY13E FY14E FY15E

Profit After Tax 6,162.4 7,418.4 8,696.7 10,477.8Add: Depreciation 698.5 795.6 871.3 913.4

(Inc)/dec in Current Assets -822.3 -2,352.1 -833.0 -4,304.2

Inc/(dec) in CL and Provisions 624.4 1,228.9 -648.0 1,336.4

Others

CF from operating activities 6,662.9 7,090.7 8,087.0 8,423.3

(Inc)/dec in Investments 5,726.9 0.0 0.0 0.0

(Inc)/dec in Fixed Assets -1,162.4 -2,325.3 -1,785.3 -1,920.0

Others 0.0 0.0 0.0 0.0

CF from investing activities -2,767.8 -2,379.6 -2,301.0 -795.8

Issue/(Buy back) of Equity 8.0 8.3 0.0 0.0

Inc/(dec) in loan funds -21.1 -9.3 -10.9 0.5

Dividend paid & dividend tax -4,088.5 -4,148.5 -5,523.4 -6,904.2

Inc/(dec) in Sec. premium 757.0 0.0 0.0 0.0

Others -0.3 0.0 0.0 0.0CF from financing activities -3,319.7 -4,132.5 -5,522.9 -6,903.2

Net Cash flow 575.4 578.5 263.1 724.3

Opening Cash 2,243.2 2,818.7 3,397.2 3,660.3

Closing Cash 2,818.7 3,397.2 3,660.3 4,384.6 Source: Company, ICICIdirect.com Research

Exhibit 14:Balance Sheet(| Crore)

(Year-end March) FY12 FY13E FY14E FY15E

Liabilities

Equity Capital 781.8 790.2 790.2 790.2

Reserve and Surplus 18010.1 21280.0 24453.3 28026.9Total Shareholders funds 18791.9 22070.2 25243.5 28817.1

LT Borrowings & Provisions 184.4 192.0 192.5 193.5

Deferred Tax Liability 872.7 1203.7 1183.7 1203.7

Others Non-current Liabilities 15.5 3.1 3.1 3.1

Total Liabilities 19864.6 23469.0 26622.9 30217.5

Assets

Gross Block 13,803.3 15,919.6 17,719.6 19,219.6

Less: Acc Depreciation 4,819.4 5,615.0 6,422.3 7,253.4

Net Block 8,983.9 10,304.6 11,297.3 11,966.2

Capital WIP 2,269.3 2,269.3 2,269.3 2,269.3

Net Intangible Assets 123.0 123.0 159.1 176.8

Non-current Investments 1,953.3 2,000.9 2,331.9 1,497.7

LT loans & advances 1,193.6 1,728.0 1,778.0 1,828.0

Current AssetsInventory 5,637.8 6,600.2 7,096.6 9,690.8

Debtors 986.0 1,163.6 1,461.0 1,888.6

Loans and Advances 500.6 512.1 954.3 1,343.4

Other Current Assets 136.9 641.4 691.8 840.1

Cash 2,818.7 3,397.2 3,660.3 4,384.6

Current Investments 4363.3 5059.4 4606.0 5351.1

Current Liabilities 9,101.8 1 0,330.7 9,682.7 11,019.1

Creditors 1,424.8 1,669.0 1,734.9 1,836.1

Provisions 4,304.0 5,133.1 4,337.3 4,590.3

Short term debt & other CL 3,373.0 3,528.6 3,610.4 4,592.6

Applicat ion of Funds 19,864.6 23,469.0 26,622.9 30,217.5 Source: Company, ICICIdirect.com Research

Exhibit 15:Ratio Analysis(Year-end March) FY12 FY13E FY14E FY15E

Per share data (|)

EPS 7.8 9.3 11.0 13.2

Cash EPS 8.8 10.4 12.1 14.4

BV 24.0 27.9 31.9 36.5DPS 4.5 5.3 6.0 7.5

Cash Per Share 3.6 4.3 4.6 5.5

Operating Ratios (%)

EBITDA Margin 35.2 35.5 37.6 38.1

PBT / Total Operating income 35.9 36.1 37.5 39.0

PAT Margin 24.5 24.8 25.8 27.4

Inventory days 4.5 4.8 4.9 4.6

Debtor days 25.2 25.4 22.8 20.3

Creditor days 15.2 17.4 17.7 19.2

Return Ratios (%)

RoE 32.8 33.6 34.5 36.4

RoCE 42.9 44.1 46.5 47.1

RoIC 40.6 41.7 43.7 42.6

Valuation Ratios (x)P/E 45.5 38.2 32.6 27.1

EV / EBITDA 31.8 26.4 22.1 19.2

EV / Net Sales 11.3 9.5 8.4 7.3

Market Cap / Sales 11.4 9.6 8.5 7.4

Price to Book Value 14.9 12.9 11.2 9.8

Solvency Ratios

Debt/EBITDA 0.0 0.0 0.0 0.0

Debt / Equity 0.0 0.0 0.0 0.0

Current Ratio 1.6 1.7 1.9 2.1

Quick Ratio 1.3 1.4 1.5 1.7 Source: Company, ICICIdirect.com Research


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Company Description

ITC, incorporated in 1910, is a professionally managed company with

institutions holding 49.9% of shares, British American Tobacco (BAT)

holding 31.2% of shares and the public having 18.9% shareholding as in

FY11. Until 1925, ITC was only in the cigarettes and leaf tobacco business.

From 1925 onwards, it diversified into various other businesses, paper

(1925), hotels (1975), agriculture (1990) and FMCG (2000), capitalising on

the opportunity in each segment. Entry into each business has also

helped it to build a synergistic value chain for all its related businesses by

providing forward and backward integration channels.

Exhibit 16:Recommendation History

100

150

200

250

300

350

400

Jul-13Jun-13May-13Mar-13Jan-13Dec-12Nov-12Sep-12Aug-12

Price Target Price


Exhibit 17:Recent ReleasesDate Event CMP Target Price Rating

8-Oct-12 Q2FY13 Preview 278 270 HOLD

22-Oct-12 Q2FY13 Result Update 294 297 HOLD

8-Jan-13 Q3FY13 Preview 286 297 HOLD

18-Jan-13 Q3FY13 Result Update 287 297 HOLD

5-Apr-13 Q4FY13 Preview 291 297 HOLD

27-May-13 Q4FY13 Result Update 334 328 HOLD

5-Jul-13 Q1FY14 Preview 343 328 HOLD Source: Company, ICICIdirect.com Research


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ICICIdirect.com Coverage Universe (FMCG)CMP M Cap

(|) TP(|) Rating (| Cr) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E

Dabur India (DABIND) 171 180 Hold 29,790 4.4 5.5 6.6 38.9 31.2 25.8 38.9 31.2 25.8 38.6 41.1 43.2 39.1 38.9 38.7

Hindustan Unilever (HINLEV) 688 590 Hold 148,574 17.6 15.4 17.3 39.2 44.7 39.7 36.3 32.0 27.9 141.7 143.9 141.4 142.8 112.0 108.5

ITC Limited (ITC) 359 328 Hold 283,675 9.3 11.0 13.2 38.4 32.8 27.2 26.4 22.1 19.2 44.1 46.5 47.1 33.6 34.5 36.4

Jyothy Lab (JYOLAB) 177 161 Sell 2,854 1.0 2.6 5.0 171.5 68.8 35.2 24.8 19.8 15.6 9.9 13.5 18.0 3.0 7.6 14.0Marico (MARIN) 218 252 Buy 13,405 6.1 7.2 9.0 35.5 30.1 24.2 22.7 19.4 16.2 30.2 28.0 29.5 25.3 21.3 21.8

Nestle (NESIND) 5,578 4,564 Hold 53,781 110.7 125.0 138.3 50.4 44.6 40.3 29.4 25.7 22.9 55.5 58.8 68.7 59.4 53.0 51.3

VST Industries (VSTIND) 1,628 2,146 Buy 2,514 81.8 114.2 125.9 19.9 14.3 12.9 13.6 9.6 8.3 53.7 77.5 91.2 42.9 58.8 67.4

Sector / Company

RoE (%)EPS (|) P/E (x) EV/EBITDA (x) RoCE (%)



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ICICI Securities Ltd Retail Equity Research Page 7

CICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional

arget price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head Research [email protected] Research DeskICICI Securities Limited1stFloor, Akruti Trade Centre,Road No. 7, MIDC,Andheri (East)

Mumbai 400 093

[email protected]

We /I, Sanjay Manyal M.B.A.(FINANCE) Parineeta Poddar M.B.A.(FINANCE) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research

eport accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the

pecific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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nderwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of

ompanies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities

enerally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts

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ICICI Direct- ITC- Slowdown trickles down to revenues GÇª

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