Analysts reiterate 'buy' ITC on strong earnings visibility

ITC shares reversed Thursday's losses and gained 2% on Friday after several analysts maintained their "buy" rating on the stock, citing strong pricing power in cigarettes and long-term growth opportunities in other segments like fast moving consumer goods.

The cigarettes to FMCG to hotels major reported slightly higher-than-expected 20% year-on-year rise in net profit at Rs 1,602 crore, while net sales were up 15% to Rs 6,652 crore.

"Overall, net revenues were in line with expectations, even as the cigarette business positively surprised (15% growth, 5% ahead) offsetting the slight miss on the other businesses," Jamshed Dadabhoy and Aditya Mathur of Citigroup said.

The union government and several state governments have raised excise duties sharply this year, which the company passed on to customers. Despite that ITC delivered some cigarette volume growth, which cheered many analysts.

"While the cigarette volume slowdown was on expected lines, given double-digit price increases in April, the marginally positive volume growth was better than expected, highlighting ITC's ability to pass higher taxes on to consumers and maintain double-digit earnings growth. We have increased our estimate of the cigarette segment's FY13 EBIT growth to 17% from 15%, and we expect ITC to maintain an EBIT CAGR of 15% in the next five years, similar to what it achieved in the past 10 years," said Amit Sachdeva and Erwan Rambourg of HSBC Global Research.

The losses in non-cigarette FMCG business reduced to Rs 39 crore from Rs 77 crore in the year ago quarter, and many analysts feel the segment will break-even this financial year.

"Business momentum (in non-cigarette FMCG) remains strong, coupled with better realizations, scale and cost efficiencies should likely help the category break even in second half of FY13," said Dadabhoy and Mathur of Citigroup.

Citigroup has a "buy" rating on ITC, with a target price of Rs 278. HSBC too is "overweight" on ITC with a target of Rs 290.

But there are some analysts who are also concerned with the increasing pressures in the cigarettes business and sharp margin decline in hotels, mainly due to lower tourist arrivals amid a weak global environment.

"We expect flat cigarette volumes to persist in FY13 as the full impact of the price increases and excise hikes gets reflected in demand in the coming quarters. We believe ITC can maintain a profit CAGR of 17% over the next 2-3 years led by price-driven growth in cigarettes and lower FMCG losses. However, we are more concerned about increasing headwinds in the cigarette industry, both globally and domestically, and the consequent risks to cigarette volume growth and ITC's re-rate story," said Nikhil Vora and Harit Kapoor of IDFC Institutional Securities.

The IDFC analysts have placed their rating and target price on ITC under review, saying a re-look of ITC's business model is warranted.

Here are some more analysts comments on ITC:

Edelweiss: We remain positive on ITC's pricing power in cigarettes and the strong foothold it is establishing in many FMCG categories. We are enthused by ITC's higher focus on premiumization (likely to drive margin growth). Rating: Buy. Target: Rs 280.

Motilal Oswal: We remain positive on the long term opportunity in ITC due to sustainable volume growth and strong pricing power in cigarette business - ITC has posted 15% cigarette EBIT CAGR since 2004 despite several tax shocks during the period. We expect Hotels growth momentum to be moderate and recovery in the industry is only expected to be gradual. Rating: Buy. Target: Rs 270.

Nirmal Bang: We forecast ITC's sales to rise at a CAGR of 15.7% for FY12-14, with most segments recording relatively steady growth over the next two years. We have forecasted flat sales-volume in cigarette business for FY13 and sales-volume growth of 5% for FY14. Many states have banned or are in the process to ban chewing tobacco which would encourage steady shift to cigarettes. Rating: Hold. Target: Rs 266.

ITC shares were up 1.9% at Rs 254.20 on NSE in afternoon trade on Friday. The stock is up near 10% so far this financial year, compared with the wider Nifty index, which has slipped around 5%.

Nachiket Kelkar
nachiket.kelkar@network18online.com