ITC's cigarette margins will continue to go up, say experts

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ News and Notices about ITC See interviews with ITC Management See what other Experts & Brokerages are saying about ITC See previous Results of ITC ITC BSE | NSE 31/05/12 Are Mutual Funds betting on ITC?

Cigarette major ITC 's second quarter FY12 sales numbers were up 17.5% at Rs 5,945 crore versus Rs 5061.2 crore and the profit after tax (PAT) was up 17.9% at Rs 1470 crore versus Rs 1246.7 crore.

The ITC Q2FY12 numbers were inline with our expectations, said Himani Singh, equity research analyst at Elara Capital and Sanjay Manyal, research analyst at ICICI Direct. Both shared a common view that the cigarette margins would continue to go up.

While Singh sets a target price of Rs 241 for the stock, Manyal remains positive on 226 levels target.

Moreover, Singh feels that the company would surprise on the positive side for this financial year. Manyal stressed on being positive on the cigarette margins.

Here is the edited transcript of their interview. Also watch the accompanying video.

Q: What is your first take on the ITC numbers?

Singh: ITC has had a very robust topline growth of around 18%, whereas our expectation was 17.5%. The company has given a positive result on the topline as well as on the bottomline. For the bottomline, they exceed our estimated by 2%. We are fairly in line with their estimates. We have had expected a price hike in terms of VAT. The state, which had taken VAT increase, we didn't expect any major drop in volume because the elasticity to price and stickiness to the habit of consumption of cigarette is very high. There is a volume uptake with value growth.

Q: Are you not disappointed with 35.28% margins? Is that in line with expectation?

Singh: Yes. Sure.

Q: What is your take on the ITC numbers? The stock has been pretty much range bound post the numbers?

Manyal: The numbers are very much in line with expectation. It has posted almost 59.74% sales, which is in line. If we see the EBITDA level, the FMCG losses have come down from Rs 66 crore to Rs 55 crore. Margins in the cigarette business have gone up.

The company has taken price hikes in August and September in anticipation of steep increase in duties in next budget. Volume growth would not be impacted much by the price hike.

This year, the company has taken a price hike in January and subsequently in August, which is for the anticipation in the next budget. The first quarter volume growth has been the continuation for the second quarter.

Q: What is your view on the stock at this point in time? The stock is trading at 206 levels.

Manyal: We are positive as far as ITC is concerned. The cigarette margins continue to go up. Our target remains at 226 levels, almost 10% upside from here.

Q: What is your price target and recommendation on the stock?

Singh: We have a strong accumulate on the stock. We have Rs 241 target price on the stock. The company will surprise on the positive side for this financial year. While post budget there would be duty hikes that could result into a month or so downward volumes, but for this financial year, we are very positive on the stock.

Q: How would you extrapolate on what we have seen in the first half of FY12 for ITC, especially in the cigarette business? What is your EPS target for the year-end?

Manyal: Our EPS target for FY13 remains 8.4. We are very much positive as far as the cigarette margins are concerned. We are very positive as far as FY12 and FY13 numbers are concerned.

Q: What key factors would you look out for in terms of the ITC numbers? Would the non-tobacco FMCG losses and cigarette business be the two factors?

Manyal: In the FMCG business, the losses have come down subsequently. In FY09, it saw a peak of almost Rs 400 crore losses. It has subsequently come down to Rs 200 crore in FY11 and is coming down even on the quarterly basis. Though the sector won't breakeven even before FY14, the visibility of breaking even will result in valuation uptick from here.