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ITC – Diversifying Profits from Cigarette into FMCG

July 23, 2010

India’s larges Cigarette manufacturer ITC saw a dip in volumes during the last quarter. This does not necessarily mean increasing health consciousness amongst Indians but their affluent lifestyle making them to hop on to Foreign Brands.

ITC’s recent pricing, coupled with mix improvements led to ~12% and ~16% YoY growth (90bps margin expansion) in cigarette revenues and profits respectively. PAT growth of ~22% YoY to Rs10.7bn was marginally ahead of our/consensus estimates of Rs10.6/10.4bn respectively. Moderate EBITDA margin expansion of ~110bps YoY to 33.4% was primarily on the back of a healthy performance of the other FMCG businesses and the paper business. Net revenues of Rs48bn (+16% YoY).

FMCG Business – Management targets to reduce losses to ~Rs2.6-2.8bn in FY11. Revenue growth of 32% YoY was driven by better realizations/mix benefits in biscuits/staples. Personal care (Vivel/ Superia) revenue run rate is now ~Rs4bn p.a. (Rs3.6-3.7 earlier). Soaps / shampoo market share is at 5% / 3.5% – up from ~3.5% / <3% end 1HFY10. Paper / Hotel / Agri Business - Better pricing and product mix enrichment drove 14%/48% YoY growth in revenues/EBIT for paper/paperboards business. b) Mgmt mentioned hotels business continued to pick up QoQ. c) Agri business revenues rose 44% YoY given higher soya, leaf tobacco & wheat sales; however segment margins contracted 150bps YoY. EPS Estimates of ITC fy 11 and fy 12
HSBC – 13 and 15
Morgan Stanley – 12.25 and 14.3
Citi – 12.79 and 14.7
Goldman Sachs – 13 and 15
Nomura – 12.79 and 14.89

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