Recommendation: Buy
CMP = Rs 206 (at the time of recommendation)
Price target: Rs 247
Key points:
- ITC registered a growth of 16.7% year on year (yoy) in its net sales to Rs 3,934.4 crore during Q4FY2008. The sales growth was led by strong growth in non-cigarette FMCG and agri-business revenues and was slightly higher than our expectation of Rs 3,865 crore.
- The operating profit margin (OPM) for the quarter declined by 104 basis points to 26.6% as against 27.6% in the corresponding quarter of the previous year. This was mainly because of the rise in the raw material cost, as the raw material cost as percentage of sales increased by 274 basis points to 46.9% as compared to 44.1% in the same quarter last year. Thus, the operating profit increased by 12.3% yoy to Rs 1,044.7 crore during the quarter.
- A jump of 60.0% in other income to Rs 163.7 crore (higher than our expectation), helped the net profit to grow by 13.1% to Rs 735.6 crore during Q4FY2008. Despite a 6% increase in excise duty and imposition of a 12.5% VAT, cigarette volumes declined only by 1% as against our expectation of 2.5% for FY2008.
- The non-cigarette FMCG business continued its remarkable progress with a 48.1% revenue growth. The segment loss increased to Rs 117.9 crore on account of the increase in the brand building activities on new product launches in the personal care category. Increase in commodity prices such as wheat, vegetable oil, maize and skimmed milk powder are imposing pressure on the margins of branded packaged food business.
- Agri business regained its growth momentum in the second half of FY2008. Consequently, agri-business revenues increased by 16.1% to Rs 1,078.1 crore and the PBIT margin improved to 3.4% for Q4FY2008.
- At the current market price of Rs 205.7 the stock trades at 17.9x its FY2010E EPS of Rs 11.5.
- I continue to maintain a strong bullish stance on the stock and a recommend Buy call on ITC with a price target of Rs 247 over next 3-6 months.
