>ITC (GOLDMAN SACHS)

In line with expectations: Robust cigarette profit growth in FY09

What surprised us
ITC’s FY2009 results were broadly in line with our forecast, with EPS up 5% yoy to Rs8.64 vs. our expectation of 6% growth, despite a lower-than expected performance in 4Q. Cigarette segment volume was down 3%- 3.5% yoy, in line with our expectation, while its EBIT growth was strong at 15% and margin rose 140 bp yoy. FMCG – Others losses were below Rs5 bn in FY2009, a tad better than we forecast. However, EBIT in Hotels was lower than we forecast, reflecting a high base in 4QFY08 and a significant industry slowdown. Agri Business revenue and EBIT also fell short of our estimates, reflecting lower soya volumes and portfolio rationalization.

What to do with the stock
Maintain Buy on ITC; our 12-mo P/E-based TP of Rs211 implies 15% upside. FY2009 was a year of modest EPS growth as we had forecast, but we expect an acceleration to double-digit earnings growth in FY2010E, led by 1) robust cigarette EBIT growth – ITC delivered 15% pa growth in FY08-09 despite steep tax hikes and an increase in contraband volumes; ITC’s consistent market share gains over the years reflect the strength of its brands and pricing power over peers; 2) we expect FMCG – Others losses to narrow; 3) Hotels should also stabilize in FY10E, while we expect strong growth in the paper business. Risks include adverse cigarette tax hikes, or any prolonged weakness in FMCG – Others and Hotels.

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