Analysts upbeat on ITC growing its FMCG, agri business

Although the company passed on the entire excise hike, their cigarette EBIT margins did not improve, says Manyal. He is positive on the stock.

Abneesh Roy of Edelweiss Securities says for them the overall sales, EBIT and PAT were in line with their expectations.

The company has shown good recovery in their profit growth, says Roy.

He is also long-term positive on the stock and thinks it is a cheaper name in the consumer space.

Roy expects FMCG and agri business to do well going forward, too.Below is the verbatim transcript of Sanjay Manyal and Abneesh Roy’s interview to Mangalam Maloo on CNBC-TV18. Q: Just about a 6 percent revenue growth as far as the cigarette business is concerned, what is your initial estimate of what the volume growth could be? Manyal: We were expecting approximately 1 percent kind of a volume growth but we are not very sure. I think there is still some de-growth probably in these numbers. We don’t know the volume growth number exactly but if calculate or extrapolate from the kind of a price hike they have taken, approximately 10 percent, we believe there should still be some de-growth. As far as the topline number is concerned, topline number is better than our expectation. However, bottomline is below what we were expecting. So, there has been a 9.5 percent growth of what I believe in the FMCG business which is a bit of positive sign. However as I mentioned, it seems that there is still de-growth in cigarette volumes. Q: How would you read these numbers because the topline has come by purely on account of a good performance in the FMCG sector but again on the EBIT margins or the EBIT front the FMCG sector has posted a loss of around Rs 4 crore. So, what would you make of these numbers as far as the initial trends are concerned?Manyal: I think again it reflects that there is a good growth in probably the FMCG side because the company has not taken very aggressive price cuts as most of the other companies have taken in the past. So, we believe the growth should be volume one and probably that reflects a bit of positive sense. However, we still need to look when the growth probably will come in the cigarette side. Probably in next few quarters we should see a growth in cigarette volumes. Q: Based on these numbers, what would your call on the stock be because it was a consensus buy and the volumes the street was expecting anywhere between 2-4 percent, we were working with that poll, a lot of the analysts that I spoke to were expecting anywhere 3 percent upwards. So, in that case with the kind of earlier indications that the volume could actually be in the negative terrain or if not negative even flattish what would your call on the stock be considering that there is consensus bullishness on ITC? Manyal: We will still remain positive on ITC because we think that this kind of a volume growth which you have mentioned or volume growth rather than a decline will come in the next two or three quarters because again the base is low. We are working on a negative growth last year in volumes so certainly the positive growth should be there this year and as I mentioned that excise hike was not that steep as it was in the last four years. So, probably the volume growth will come into the positive territory and we are very positive on the FMCG business as it is increasing its presence in almost every category now whether it is milk products or for that matter chocolates or even the juices. There are a lot of new categories which has a huge opportunity so we are positive on the FMCG side of the business. Q: What is your early call on the numbers so far top line 8.3 percent below estimates at the same times cigarette revenue which is 6.5 percent, what are your early inferences of what the volume growth could be?Roy: So on an overall basis sales, earnings before interest, tax, depreciation and amortization (EBITDA), profit after tax (PAT) ITC results are in line with our expectation. Cigarette volume growth is around 3-4 percent, so it has definitely improved versus the zero percent growth seen previous quarter and negative for the in the past 12-13 quarters mostly it has been negative except the flattish, so we are now back to 3-4 percent volume growth which clearly is a positive development and that’s coming on the back of the lower tax excise hike this time. So we are positive, so FMCG has recovered smartly from 5 percent growth it is 9.5 percent, agri business also wheat exports have really done strongly this time it is a 20 percent growth and paper is a function of overall FMCG volumes and cigarette volumes, FMCG volumes for the industry also, so that has disappointed. So net, net cigarette is what drives an FMCG to an extent also is important, but cigarettes clearly it’s a decent performance 3-4 percent. We were expecting 2 percent volume growth they have done 3-4 percent volume.Q: Your call on the stock, how would you reckon the stock will perform in tomorrow’s trading session, how would the street like this numbers?Roy: Not commenting on tomorrow, because we have a longer term view. From a longer term view we remain positive. I think the stock remains one of the most cheaper name in the consumer space, 3-4 percent volume growth is a decent performance, FMCG 9.5 percent growth is again a positive number, which I think will accelerate because now if you see the noodles as a segment as a category is recovering. ITC has gained market share versus what it was pre-Maggi Nestle issue and definitely juices and all those new businesses are also expected to do well. So we are positive from longer term not commenting on the near term performance. For entire discussion, watch accompanying videos