HDFC Securities is bullish on ITC has recommended buy rating on the stock with a target price of Rs 362 in its research report dated August 05, 2019.
HDFC Securities' research report on ITC
Cig. revenue growth missed estimates with value/volume growth of 6/3.5% (10/5.5% in FY19) vs. exp. of 9/5.5%. 5th consecutive quarter of volume growth vs. -4% CAGR over FY12-18. A high base and slowdown impacted volume growth in 1Q. Cig. EBIT grew by 8% (6.5% CAGR over FY15-19) vs. exp. of 9% growth. Cig. EBIT margins expanded by 145bps owing to (1) Price hikes (~3%) and (2) Scaling manufacturing of capsules (70% in-house by Dec-19). Margin decline in FY19 was the key concern on the street, we expect this to reverse in FY20. We expect cig EBIT CAGR of 8% over FY19-22E. Non-cig business grew by 12% (exp. 11%). FMCG biz growth of 8% was in-line vs. its peers (HUL/Dabur/Marico/Colgate 7/11/6/6%). FMCG EBITDAM expanded by 140bps to 5.9%. Hotels/Agri/Paper revenue grew by 15/15/13% with EBIT growth of -21/4/12%. Non-cig EBIT grew by 12% (7% CAGR over FY14-19). GM expanded by 180bps to 64% owing to cig price hikes. Employee/other expense grew by -7/2% resulting in 9% EBITDA growth (11% in FY19 and 7% CAGR over FY15-18). APAT growth of 13% was driven by other income (+54%) and 41bps decline in tax rate.
ITC’s 1Q performance was soft vs. its FY19 show but in-line with FMCG peers. We expect 1Q growth trajectory to replicate over FY20, led by higher base of cig. volume growth and consumption slowdown. We value ITC on SoTP basis (link to table) and arrive at a TP of Rs 362 (implied P/E of 28x vs. earlier assigned P/E of 32x). We de-rate cigarette business by 10% (EV/EBITDA 18x vs. 20x implied earlier) owing to slower than expected volume growth in the era of stable taxes. Maintain BUY.
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