ITC's Q3FY18 results (Outperformer) - Higher margins offset lower cigarette volumes
Q3FY18 result highlights
- ITC 3QFY18 reported revenues stood at Rs99.5bn (est: Rs102bn). EBITDA grew 10% yoy at Rs 39bn(est: Rs38bn). Adjusted PAT increased by 6.6% yoy to Rs28.2bn (Rs28.4bn).
- Comparable cigarette revenues increased by ~5%, largely aided by pricing as volumes declined by 5% yoy for the quarter. Cigarette EBIT grew by 7.8% yoy; aided by higher price hikes and lower base given the trade related costs in 3QFY17.
- Comparable FMCG revenues increased 16.2% yoy led by packaged food business, personal care and stationary products business. Hotels revenues increased by 9.2% yoy (comparable sales growth of 10% yoy). Agri and paper division sales declined by 8.4% and 4.2% yoy
- Adjusting for exceptional item of Rs4.1bn (Rs2.7bn post tax on account write back of provision of earlier years with respect to Tamil Nadu entry tax), PAT increased by 6.6% yoy to Rs28.2bn.
Key positives: Healthy FMCG growth; strong cigarette EBIT margin expansion
Key negatives: Higher than expected decline in cigarette volumes
Impact on financials: No change in estimates.
Valuations & view
In a challenging operating environment, ITC has delivered a good set of results. In spite of cigarette volume recovery being slower than expected, the company has managed to accelerate the EBIT growth from Q2FY18 levels, which comes as a positive. In a steady state environment, we believe cigarette volumes would slowly revive and EBIT growth would recover to double digit levels for the company. However, this assumption hinges on only moderate tax increase (sub 10%) in FY19 (in the Budget or otherwise). This with the help of recovering growth and profitability in other categories, we expect a 13% EPS CAGR over FY18-20E. With the stock trading at 24xFY20E earnings, it is at a 30% discount to our consumer coverage universe. We believe risk reward is favourable; maintain Outperformer. Key event to watch out for would be the Union Budget on February 1st
ITC is a diversified manufacturing and marketing company which is based in India. Co. maintains an operating presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG products. While Co. is an outstanding market leader in its traditional businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports, it is rapidly gaining market share even in its nascent businesses of Packaged Foods & Confectionery, Branded Apparel, Personal Care and Stationery.
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