>ITC: Cigarettes - Steady profit growth in a pricing-driven quarter (JEFFERIES)

4Q12 was yet again a pricing-led quarter for cigarettes, with lower volume growth (<5% YoY) but much stronger margins (+210bps YoY) - clear evidence of ITC's pricing power and unique cost structure. We see the price-volume trend diverging further in FY13, post the sharp excise duty hikes, but expect overall segment profit growth to remain intact at 19%. Maintain Buy.


Cigarettes - Steady profit growth in a pricing-driven quarter: Cigarette revenues grew 11% YoY, slightly below expectations although EBIT growth at 20% was in-line. The impact of price hikes (beginning of 4Q) appears to have been higher than forecast on volumes (sub-5% growth, weaker than expected), as well as margins (31%, 140bps above estimates) - both effects offsetting each other. This is yet another indication of ITC's pricing power and cost structure in this business, which allows the company to pass on cost pressures (in the form of higher duties) and keep profit growth intact. We see this trend continuing in FY13 and expect the recent increase in excise duties (c22% YoY per stick on average) to be passed on, with a corresponding impact on volumes (-4% YoY in FY13E). Overall, we make marginal changes to our cigarette segment estimates (revenues and EBIT +2-3%) as most of the excise duty hike was already factored into our estimates.


Other businesses - FMCG losses narrow, capacity constraints in paper: The FMCG segment fared better than expected, as revenues grew in-line (+23% YoY) while losses were a third of our forecast. While improved profitability in the foods segment contributed, we believe a large part of the beat was due to lower ad spends - a trend witnessed in the rest of the industry as well. We do not expect these low levels of media spend to sustain, and keep our forecast for FMCG losses unchanged (Rs1.5bn in FY13E).


The paper segment was weaker in 4Q (revenues +7.4% YoY) mainly on account of capacity constraints and a relatively high base. With new capacity scheduled to contribute in FY13E, we expect revenue growth to recover going forward (+17% in FY13E, vs 13% in FY12). The hotels segment continued to be weak as revenues declined 5% YoY. Weak sentiment combined with increase in supply has likely impacted ARRs. We reduce our forecasts for the hotel segment (FY13E EBIT -9%) given the current run-rate.


Valuation/Risks
We raise our EPS estimates by c3% and roll forward our SOTP-based TP to FY14E. We value the cigarette business at Rs 207/share (25x FY14E, in-line with FMCG peers). Risks a) deterioration in cigarette regulatory environment, b) significantly higher losses in FMCG.


To read report in detail: ITC
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