RESULTS REVIEW 3QFY20 01 FEB 2020 ITC BUY HDFC securities Institutional Research is also available on Bloomberg ERH HDF <GO>& Thomson Reuters Holding steady… ITC clocked in-line performance despite continued macro challenges. ITC’s performance was in sync with other FMCG companies. ITC-Cig/ITC-FMCG growth was at 5/6% vs. HUL/Dabur/Colgate/Marico posted domestic growth of 4/6/4/-1% in 3QFY20. ITC’s cig/FMCG performance was very much comparable to other FMCG cos for the past many quarters. Despite that, stock has de-rated over the last 12 months. We believe de-rating is unwarranted when the co is consistently showing quality earnings. We value ITC on SoTP basis (link to table) and arrive at a TP of Rs 360 (implied P/E of 25x). Maintain BUY. HIGHLIGHTS OF THE QUARTER Cig. val/vol growth was 5/2% (10/5.5% in FY19, 10/7.5% in 3QFY19) was in-line with estimates. 8 th consecutive quarter of positive volume growth vs. -4% CAGR over FY12-18. Volume growth moderated vs. FY19 owing to heavier base and impact from slowdown. Cig. EBIT grew by 6% (6.5% CAGR over FY15-19) vs. exp. of 8% growth. Cig. EBIT margins expanded by 60bps owing to (1) Gradual price hikes (~3%) and (2) Higher in-house manufacturing of capsule cig. Capsule cig is driving the growth for ITC and industry, it contributes 13% mix for ITC. Margin pressure was the key concern on the street in FY19 that has reversed in 9MFY20 (100bps expansion). We model 7% cig EBIT CAGR over FY20-22E. Non-cig business grew by 7% (est 9%. FMCG biz growth of 6% was in-line with our estimates FMCG posted EBITDA growth of 48% with EBITDA margin of 7.7%. Hotels/Agri/Paper revenue grew by 22/9/1% with EBIT growth of 45/7/1%. Non-cig EBIT grew by healthy 11% (11% average in the last 12 quarters, 7% over FY14-19). GM was flat at 62% while employee/other expense grew by 6%/flat resulting in 7% EBITDA growth (11% in FY19 and 7% CAGR over FY15-18). APAT (at 25% tax rate) growth was 18% to Rs 37.8bn (est Rs 37.6bn). STANCE Stable taxes in FY19 accelerated cigarette volume growth to 5.5% vs. -5% CAGR during FY15-18. EBIT growth also accelerated to 9% as compared to 7% CAGR during FY15-18. Yet company could not enjoy re-rating as investors have flocked towards ITC’s peers (HUL, Dabur and Britannia etc.). Rather cigarette business saw de-rating (>20% fall, based on assigning fair valuation to other segments) over the last 12- months. We expect cig valuation will recover owing (1) Continuation of stable taxes, (2) EBIT margin expansion and (3) Pickup in rural market. We believe cigarette valuation will recover to its average of 18x EV/EBITDA (still lower than 25x for Colgate which is similar wrt market leadership, vol growth trajectory and pricing power). Other catalyst in the business is FMCG, better margin traction will also offer better value for ITC. We continue to believe that valuation discount will narrow down. Financial Summary (Consolidated) YE March (Rs mn) 3QFY20 3QFY19 YoY (%) 2QFY20 QoQ (%) FY18 FY19 FY20E FY21E FY22E Net Revenues 120,130 114,313 5.1 118,715 1.2 434,489 483,527 509,734 552,640 604,325 EBITDA 46,127 43,258 6.6 45,624 1.1 164,830 184,064 195,110 211,874 233,041 APAT 37,766 32,091 17.7 40,231 (6.1) 112,202 127,864 157,911 167,920 183,879 Diluted EPS (Rs) 3.1 2.6 17.6 3.3 (6.1) 9.2 10.4 12.9 13.7 15.0 P/E (x) 25.6 22.5 18.3 17.2 15.7 EV / EBITDA (x) 15.9 14.1 12.9 11.7 10.4 Core RoCE (%) 37.2 39.2 45.8 47.9 50.5 Source: Company, HDFC sec Inst Research INDUSTRY FMCG CMP (as on 31 Jan 2020) Rs 235 Target Price Rs 360 Nifty 11,962 Sensex 40,723 KEY STOCK DATA Bloomberg ITC IN No. of Shares (mn) 12,292 MCap (Rs bn) / ($ mn) 2,890/40,485 6m avg traded value (Rs mn) 3,347 STOCK PERFORMANCE (%) 52 Week high / low Rs 310/231 3M 6M 12M Absolute (%) (8.7) (13.0) (15.6) Relative (%) (10.2) (21.6) (27.9) SHAREHOLDING PATTERN (%) Sep-19 Dec-19 Promoters 0 0 FIs & Local MFs 42.45 42.58 FPIs 15.64 15.18 Public & Others 41.89 42.24 Pledged Shares 0.00 0.00 Source : BSE Naveen Trivedi [email protected]+91-22-6171-7324 Aditya Sane [email protected]+91-22-6171-7336
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RESULTS REVIEW 3QFY20 01 FEB 2020
ITC BUY
HDFC securities Institutional Research is also available on Bloomberg ERH HDF <GO>& Thomson Reuters
Holding steady…ITC clocked in-line performance despite continued macro challenges. ITC’s performance was in sync with other FMCG companies. ITC-Cig/ITC-FMCG growth was at 5/6% vs. HUL/Dabur/Colgate/Marico posted domestic growth of 4/6/4/-1% in 3QFY20. ITC’s cig/FMCG performance was very much comparable to other FMCG cos for the past many quarters. Despite that, stock has de-rated over the last 12 months. We believe de-rating is unwarranted when the co is consistently showing quality earnings. We value ITC on SoTP basis (link to table) and arrive at a TP of Rs 360 (implied P/E of 25x). Maintain BUY. HIGHLIGHTS OF THE QUARTER Cig. val/vol growth was 5/2% (10/5.5% in FY19, 10/7.5% in
3QFY19) was in-line with estimates. 8th consecutive quarter of positive volume growth vs. -4% CAGR over FY12-18. Volume growth moderated vs. FY19 owing to heavier base and impact from slowdown.
Cig. EBIT grew by 6% (6.5% CAGR over FY15-19) vs. exp. of 8% growth. Cig. EBIT margins expanded by 60bps owing to (1) Gradual price hikes (~3%) and (2) Higher in-house manufacturing of capsule cig. Capsule cig is driving the growth for ITC and industry, it contributes 13% mix for ITC. Margin pressure was the key concern on the street in FY19 that has reversed in 9MFY20 (100bps expansion). We model 7% cig EBIT CAGR over FY20-22E.
Non-cig business grew by 7% (est 9%. FMCG biz growth of
6% was in-line with our estimates FMCG posted EBITDA growth of 48% with EBITDA margin of 7.7%. Hotels/Agri/Paper revenue grew by 22/9/1% with EBIT growth of 45/7/1%. Non-cig EBIT grew by healthy 11% (11% average in the last 12 quarters, 7% over FY14-19).
GM was flat at 62% while employee/other expense grew by 6%/flat resulting in 7% EBITDA growth (11% in FY19 and 7% CAGR over FY15-18). APAT (at 25% tax rate) growth was 18% to Rs 37.8bn (est Rs 37.6bn).
STANCE Stable taxes in FY19 accelerated cigarette volume growth to 5.5% vs. -5% CAGR during FY15-18. EBIT growth also accelerated to 9% as compared to 7% CAGR during FY15-18. Yet company could not enjoy re-rating as investors have flocked towards ITC’s peers (HUL, Dabur and Britannia etc.). Rather cigarette business saw de-rating (>20% fall, based on assigning fair valuation to other segments) over the last 12-months. We expect cig valuation will recover owing (1) Continuation of stable taxes, (2) EBIT margin expansion and (3) Pickup in rural market. We believe cigarette valuation will recover to its average of 18x EV/EBITDA (still lower than 25x for Colgate which is similar wrt market leadership, vol growth trajectory and pricing power). Other catalyst in the business is FMCG, better margin traction will also offer better value for ITC. We continue to believe that valuation discount will narrow down.
Net revenues grew by 5% (exp of 7%) as cig. revenue growth was steady at 5% despite consumption slowdown and floods Cigarette volumes grew by ~2% (exp 2.5%; 7.5% in 3QFY19 and 3% in 2QFY20) FMCG business grew by 4.2% driven by packaged foods and personal care products EBITDA growth of 6.6% was below our exp of 9.2% APAT (at 25% tax) growth of 17% was in line with our expectation
Cigarette business grew by 5% during the quarter with ~2% volume growth. Slightly below expectation performance Non-cigarette portfolio continued to show healthy growth, registered 7% growth (9% average growth in the last 12 quarters) Hotel biz sustaining robust growth and posted 22% growth, EBIT margin was strong at 16% Paper revenue/EBIT growth was flat
Cig EBIT margins expanded owing to higher mix of capsule cigarettes FMCG EBIT margin expansion was driven by enhanced scale, product mix enrichment and cost management initiatives notwithstanding higher investments in brand building and gestation costs of new categories
ITC: RESULTS REVIEW 3QFY20
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Cigarette Value Growth Cigarette Volume Growth
v
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Cigarette Price Growth Cigarette EBIT Growth
b
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
7th consecutive quarter of positive volume growth. We model 3.5% volume growth in FY21E/22E Cigarette EBIT growth of 5.6% was below our estimate of 7.5%. We expect cig. EBIT to grow faster vs. revenue growth
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FMCG Revenue Growth Hotel Revenue Growth
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Agri Revenue Growth Paper Revenue Growth
v
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
ITC’s FMCG business growth in the recent quarters is at par with HUL Hotel business is on a strong momentum driven by higher occupancy rates and ARR
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
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FY14 FY15 FY16 FY17 FY18 FY19
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Mangaldeep3%
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ITC’s FMCG business is dominated by packaged foods (77% revenue mix vs. 71% in FY14)
Gross margins for FMCG business is at par with peers (40-45%). However, mid-single digit EBITDAM is owing to (1) Higher upfront brand investments and (2) Losses in retail business
EBIT margins are steadily expanding as brands gain critical scale and co has restructured retail biz
Based on our assumptions, implied 5 year historical valuations for ITC’s cig business ranges between 15-20x EV/EBITDA We believe FMCG business has witnessed a re-rating over the years owing to higher scale and margin expansion Re-rating in hotels is led by favourable industry dynamics (higher ARR and occupancy rate) Re-rating in paper is led by recovery in volume growth in FMCG industry. Co has also expanded margins owing to richer product mix (focus on value added)
ITC: RESULTS REVIEW 3QFY20
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SOTP Valuation Segments Criteria Value Cigarette EBITDA (Rs mn) 167
EV/EBITDA (x) 18
EV (Rs mn) 3,010 FMCG Revenue (Rs mn) 156
EV/Revenue (x) 5 EV (Rs mn) 780 Hotel EBITDA (Rs mn) 5
EV/EBITDA (x) 20
EV (Rs mn) 101 Agri EBITDA (Rs mn) 10
EV/EBITDA (x) 8 EV (Rs mn) 80 Paper EBITDA (Rs mn) 19
EV/EBITDA (x) 10
EV (Rs mn) 191 Total EV 4,161 Cash+Investment 360 Mkt Cap 4,521 TP 360
ITC: RESULTS REVIEW 3QFY20
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Changes In Estimates
Estimate Change FY20E FY21E FY22E
New Old Change (%) New Old Change (%) New Old Change (%) Revenue 509,734 512,127 (0.5) 552,640 558,835 (1.1) 604,325 613,439 (1.5) EBITDA 195,110 196,409 (0.7) 211,874 215,247 (1.6) 233,041 238,021 (2.1) APAT 157,911 158,072 (0.1) 167,920 169,655 (1.0) 183,879 186,147 (1.2) EPS 12.9 12.9 (0.1) 13.7 13.8 (1.0) 15.0 15.2 (1.2)
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Per capita consumption of Tobacco in India – Per annum
Affordability (% of per capita GDP required to purchase 100 packs of 20 cigarettes of most sold brand
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
High rates of tax on cigarettes provide attractive tax arbitrage opportunities to unscrupulous players, fanning the growth of illegal cigarette trade in the country The legitimate cigarette industry has declined steadily since 2010-11 at a compound annual rate of 4.8% p.a., illegal cigarette volumes in contrast have grown at about 5% p.a.
Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel, Mumbai - 400 013 Board : +91-22-6171 7330 www.hdfcsec.com
ITC: RESULTS REVIEW 3QFY20
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