>ITC LIMITED: Ban on gutkha to aid cigarette volumes

FMCG losses declining; margins improve…


ITC’s Q1FY13 results were in line with our estimates with earnings witnessing growth of 20.2%. Cigarettes volume growth was flat on the back of ~15% price hike following the ~20% excise duty hike in the 2012 Budget. Based on our reverse calculations (through excise duty) we
believe there is a marginal de-growth in cigarette volumes. However, we expect cigarettes volumes to pick up in the rest of the year as the ban on Gutkha and Pan in six states would result in a shift in consumption from other tobacco products to cigarettes. FMCG revenues also witnessed 23% increase YoY led by 11-13% volume growth and ~10% price hike in selected products. We expect ITC to take further price hike in cigarettes in H2FY13E and break-even in FMCG business by FY14E; driving revenue and earnings growth, going forward. Maintain HOLD.


FMCG losses slide; cigarette volumes dip
In Q1FY13, FMCG losses declined ~50% YoY on the back of considerable price rise hikes and strong volume growth. However, cigarette volumes were flat due to ~15% increase in prices. We believe that cigarette margins improved led by a dip in raw tobacco prices. Agri business’s
earnings improved 16% YoY led by currency gains from export of raw tobacco. Hotel business earnings were down 50% due to an increase in operating expenditure after the commencement of Chennai property.


Ban on gutkha to aid cigarette volumes
Six state governments have already banned gutkha and pan masala. We believe other state governments would follow suit and implement the ban under the COTPA act. We believe this would shift consumption from other tobacco product to cigarettes hence driving ITC’s volume growth.


Continues to command 2x premium to Nifty
The stock is trading at a 120% premium to the Nifty compared to the historic average of 70% on PE multiples. With strong growth in the FMCG business and sustained margins in the cigarettes business, we believe ITC would continue to command this premium. We have valued the stock on an SOTP basis and maintained our target price of | 270 with HOLD rating.