MOSL: ITC (Neutral)-In-line, but Cig. volumes disappoint
ITC: In-line, but Cig. volumes disappoint
(ITC IN, Mkt Cap USD46.7b, CMP INR265, TP INR290, 10% Upside, Neutral)
- Net revenues grew 5.8% YoY to INR115b (our est. 9.4% growth to INR117.1b). EBITDA grew 8.7% YoY to INR45.7b (our est. INR45.9b) while Adj. PAT increased 12.6% YoY to INR31.7b (our est. INR30.9b). Overall Gross/EBITDA margins expanded 180bp/110bp YoY to 64%/39.7%.
- Cigarette volumes are likely to have grown ~3% (our est. 6%), leading to cigarette net sales growth of 6% YoY. Cigarette EBIT margins expanded 140bp YoY to 70.8%. Thus, Cigarette EBIT grew 8% YoY to INR38.5b, lower than our estimate of 10.7% YoY to INR39.4b.
- FMCG-Others net sales up 6.6% YoY (up 8% on comparable basis, excluding the Lifestyle Retailing Business) to INR30.6b, amidst a marked slowdown in the FMCG industry across urban and rural markets. FMCG-Others EBIT improved to INR780m YoY in 1QFY20 (INR501m in the base quarter). Revenues of Agri Business/Paperboards, Paper & Packaging/Hotels grew 14.6%/12.7%/15%.
- Valuation & view: Despite over two years since the last GST hike, cigarette EBIT growth traction doesn't seem to be improving beyond high single-digits. Risk of sharp GST increase in subsequent council meetings, after the lull and potential increase in advalorem GST rates, further presents risks to the already modest earnings prospects of 8% EPS CAGR over the next two years. While ITC trades at a discount to Indian FMCG peers at 22.3x FY21E EPS, it is actually at a premium to global cigarette majors (1.5-2.5x). Maintain our Neutral rating with TP of INR290 (24x Jun'21 EPS).
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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