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Delivers on expectations, but smoky outlook keeps us neutral
* ITC delivered growth of 13.3% YoY in net revenue (INR119.9b v/s our estimate of INR120.3b), 10.3% YoY in EBITDA (INR45.7b v/s our estimate of INR46.9b) and 18.7% YoY in adj. PAT (INR34.8b v/s our estimate of INR32b) in 4QFY19. EBITDA margin shrank 100bp YoY to 38.1% (our estimate: 39%).
* Cig volumes are likely to have grown at ~8% YoY (our estimate: 7% YoY), as against a decline of 2% YoY in the year-ago period, leading to segmental net sales growth of 11.1%. Cig EBIT margin shrank 70bp YoY to 70.3%, leading to EBIT growth of 10% YoY to INR38.6b (our estimate: INR38.8b).
* Other FMCG net sales grew 7.3% YoY to INR32.7b, with EBIT of INR1.3b (4QFY18: INR912m). Agri Business, Paperboards, Paper & Packaging and Hotels revenue grew 16.2%, 18.2% and 24.9% YoY, respectively.
* FY19 performance:
Sales, EBITDA and adj. PAT grew 10.8%, 11.4% and 15.3%, respectively. EBITDA margin expanded 20bp YoY to 38.5%.
* Valuation and view:
Although ITC delivered an in-line performance, we marginally cut our EPS forecast for FY20/21 by 2.8%/1.7% to factor in the challenging operating environment for consumer companies. Even after 22 months since the last GST hike, Cig EBIT growth has not surpassed 10%. Moreover, our moderate 9.3% earnings CAGR (FY19-21) estimate has a downside risk if the GST Council increases the tax rates in its subsequent meetings. Note that the more the delay, the more is the risk of a sharp tax rate increase, which would eventually exert significant pressure on volumes. An increase in the ad valorem duty would sour the investment case further. While ITC trades at a discount to Indian FMCG peers at 23.9x FY21E EPS, it is at a premium to global cigarette majors (1.5x-3x). Due to the uncertain cigarette earnings outlook (account for 85% of EBIT), we maintain our Neutral rating with a target price of INR305 (25x FY21E).
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