Though ITC's June quarter results were below expectations, most analysts suggest buying the stock and see cigarette volume to rise further.
Reliance Securities expects ITC to post revenue and earnings CAGR of 12.1 percent and 13.3 percent respectively through FY16-18 and maintains buy recommendation on the stock with revised target price of Rs 291 per share. It estimates cigarettes business volume growth of 2 percent (annual) in Q1, marking its highest rate in past 13 quarters.
Citi has a buy rating on the stock with an increased target price of Rs 295 per share. After 12 quarters of negative or subdued volumes, Q1FY17 retail volumes slightly higher at 4-5 percent is positive for the FMCG major. It adds that despite better volumes, mix shift to 64mm and constrained pricing have impacted cigarette EBIT slightly.
The brokerages have tweaked FY17 estimates and sees volumes from flattish trends to over 3 percent.
Goldman Sachs also has a buy rating but lowered target price to Rs 263 per share as it believes that improving volume trends will lead to valuation converging. It has cut lFY17-19 earnings per share (EPS) estimates by 2-5 percent to reflect lower tobacco sales and agri margins.
ITC’s hotels reported better margins despite Q1 being a non-seasonal quarter, but continued weakness in occupancy and rentals. The agri-business reported strong sales growth due to wheat and tobacco leaves exports, but weaker margins due to higher commodity trading. The paper segment also reported weaker-than-expected margins.
ITC’s profit grew 10 percent at Rs 2,384.7 crore in April-June quarter compared with Rs 2,166 crore in same period last fiscal. Revenue on standalone basis increased 8.3 percent to Rs 13,253 crore during the quarter from Rs 12,232.65 crore in corresponding period of last fiscal.
Its cigarette business which contributes 62 percent to total revenue, has registered a 6.4 percent growth in revenue at Rs 8,230.6 crore on yearly basis with the earnings before interest & tax (EBIT) growing 8 percent and margin expansion of 50 basis points.
Religare retains buy rating with a target of Rs 270, ascribing 23x price to equity (P/E) and 2x enterprise value /sales to cigarettes and FMCG businesses respectively. "A sharp increase in cigarette taxes due to the GST rollout is a key risk to our call," it adds. Religare retains buy rating with a target of Rs 270, ascribing 23x price to equity (P/E) and 2x enterprise value /sales to cigarettes and FMCG businesses respectively. The brokerage firm says cigarette volumes likely grew 3 percent in Q1 on sequential basis.
“Increasing share of DSFT cigarettes (more than 20 percent of total cigarette volume) has aided growth in volume. While overall gross revenue of the division increased 6.4 percent to Rs 8230 crore, segmental margins too improved by 50 basis points (bps) to 36.5 percent of gross sales in 1QFY17, which in our opinion is impressive considering the portfolio shift toward low-priced cigarettes,” it says in a report.Follow @NasrinzStory
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