ITC results in-line, other FMCG profits surprise: StanChart

ITC's fourth quarter results were largely in-line with expectations and the profitable turnaround in the other FMCG business was a surprise, Standard Chartered Securities' consumer analyst Sanjay Singh said on Monday.

Speaking on CNBC-TV18, he further said that ITC's cigarette volumes are likely to decline 3 percent in the first quarter and FY2014.

The brokerage meanwhile has downgraded Titan to "in-line" and Singh expects the company's jewellery margins to remain pressured in FY14.

Bangalore-based Titan had reported lower-than-expected fourth quarter results earlier this month. Subdued economic environment and other factors like high gold prices last year had impacted jewellery business in FY13, the company had said.

Below is the edited transcript of Singh's interview to CNBC-TV18.

Q: What did you come away with from the ITC number, a positive surprise on the cigarette volumes or some of the other verticals, which probably took away from the margins?

A: Overall the results were largely in line. We were expecting cigarette volume to be 1 percent, it was a tad bit higher. So there is nothing very significant in terms of cigarette numbers. FMCG profits was a positive surprise, which was largely known but to my mind. It was expected but of course once you see it, it gives you lot more confidence in that sense. Hotels were disappointing, paper was disappointing, so net-net I think cigarettes and FMCG was good, which was to an extent expected. So no significant surprises but in the current environment it again delivers - investors have faith in the company. Overall numbers were pretty okay.

Q: The problem is that through the course of the last month or so, many state governments have put out fairly onerous additional taxes on cigarettes, what would you extrapolate from what they have done this time around in terms of cigarette volumes and in terms of what they can do in the quarters ahead?

A: June quarter numbers would be significantly important for the company because VAT rates have gone up and hence prices have gone up quite significantly and we need to see how volumes pan out. My personal sense is what we are estimating as of now is a negative volume growth of around 3 percent or so. But yes, June quarter volumes would be closely watched per se. March quarter numbers were anyway insignificant because people will be closely watching June quarters as to how the Budget and the corresponding changes impact ITC’s numbers.
 
Q: How do you see the technical’s for that stock right now with the Hindustan Unilever (HUL) offer open and with so many people deciding on whether they should be tendering in that offer, do you see post offer a lot of the money shifting to ITC?

A: I don't see HUL, infact we have published a report on HUL open offer and our view is that HUL open offer will hardly be subscribed fully. So we expect only the promoter holding going up from 52 percent to 65 percent or even lower because one is the offer price is not supremely attractive for long-term investors to forgo an opportunity to participate in HULs long-term growth story.
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Secondly, the shareholding pattern if you see is very different from what you saw in GlaxoSmithKline (GSK) where a large proportion of domestic holders were holding GSK. Here it is very long only focused, Foreign Institutional Investors (FIIs) who are holding HUVR. So my sense is you will not see much subscription happening into HUL and hence money flowing into ITC by that logic doesn’t stand.

Q: What do you guys have as a recommendation on Titan Industries now in the light of recent developments in the international gold space?

A: Titan was our top pick for last two and half years, it was a buy for us. We have just downgraded the stock on Friday to an inline. I think what is happening in Titan is stock had a very good run in the last couple of months mainly because of strong news flow on demand post the gold price correction. However the gold price again has slipped off from USD 1450-1475 levels to USD 1350. And we believe that the demand will now not be able to catch up. The initial fall was caught up by retail but now demand will not be as strong. Hence we are little negative on Titan at this point of time.

Also lot of margin drivers which were present in FY13 may not be present in FY14 hence you could see jewellery margins may be falling a tad short coming down year on year for the very first time in 8-10 years. And given the demand scenario and given the margins we are little negative on Titan. Also the regulatory reasons are not completely over. While we do not believe it will hurt Titan strongly but it still is a cause of concern per say and it is not there in our numbers yet. So coupled with demand, regulators and margins for jewellery, we believe one should be cautious on Titan at this point of time.

Q: You track Jubilant Foodworks, what did you make of the numbers, that disappointment on same store sales and how are you guys calling the stock now?

A: If you see overall FMCG space results this quarter, out of the 15 stocks that we cover results are out for 13 and we are seeing almost a disappointment in five-six stocks in terms of results. Jubilant, Asian Paints, Nestle, Marico are the key disappointing results. Jubilant again very poor same store sales growth, it is in line with our belief that discretionary is going through a lot of pain and probably will see more pain in times to come. So Jubilant same store sales growth we believe that June quarter will be worse than March quarter if not similar. An improvement is not round the corner in the near term.

Coming back to the stock it is an inline call for us per se and with a target price of around Rs 1090. However the call is that discretionary is weak, it will hurt margins also because the costs are largely fixed. Hence margins would get hit and so we are little cautious again on Jubilant, Asian Paints and Titan the whole discretionary space to that extent. Of course stocks have not reacted to results largely because the euphoria around consumer continues and the running joke is that if you don't have an open offer then you get included in the MSCI index and hence the overall interest in consumer continues to be very high.