Volume No. I Issue No. 19 May 02, 2014 FINANCIAL SUMMARY. SALES OPM OP OTHER PBIDT INTEREST PBDT DEP. PBT TAX PAT EPS* (%) INC.

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1 For private circulation only Volume No. I Issue No. 19 ITC Terrific consistency Price: Rs 340 Target Price: Rs 410 Sensex: 22,404 Nifty: 6,695 FINANCIAL SUMMARY SALES OPM OP OTHER PBIDT INTEREST PBDT DEP. PBT TAX PAT EPS* (%) INC. (Rs) 1503 (12P) (12P) (12) (12) (12) *Annualised on diluted capital of Rs crore. Face Value: Re 1. EO: Extraordinary items. (P): Projections. Figures in Rs crore. Source: Capitaline Databases STOCK DATA BSE Code : BSE Group : A NSE Code : ITC Bloomberg : ITC IN Reuters : ITC.BO Par Value : Rs week High/Low : Rs 380 / Rs 281 Sector : Tobacco Products SHAREHOLDING PATTERN* Category % of equity Foreign : Institutions : Corporate Holding : 4.45 Promoters : Public & Others : Total : 100 * as on 31 st March 2014 Source: Capitaline Databases ITC has robust portfolio encompassing Fast Moving Consumer Goods (FMCG), Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business and Information Technology. This diversified presence in the businesses of tomorrow is powered by a strategy to pursue multiple drivers of growth based on its proven competencies, enterprise strengths and strong synergies between its businesses. The competitiveness of ITC s diverse businesses rest on the strong foundations of institutional strengths derived from its deep consumer insights, cutting-edge Research & Development, differentiated product development capacity, brand-building capability, world-class manufacturing infrastructure, extensive rural linkages, efficient trade marketing and distribution network and dedicated human resources. ITC s ability to leverage internal synergies residing across its diverse businesses lends a unique source of competitive advantage to its products and services. Within a relatively short span of time, ITC has established vital brands like Aashirvaad, Sunfeast, Dark Fantasy, Delishus, Bingo!, Yippee!, Candyman, mint-o, Kitchens of India in the Branded Foods space; Essenza Di Wills, Fiama Di Wills, Vivel, Vivel Cell Renew, Engage and Superia in the Personal Care products segment; Classmate and Paperkraft in Education & Stationery products; Wills Lifestyle and John Players in the Lifestyle Apparel business; Mangaldeep in Agarbattis and Aim in the Safety Matches segment. This growth has been rated by a Nielsen Report to be the fastest among the consumer goods companies operating in India. Besides dominating cigarette industry, today ITC is the country s leading FMCG marketer, the clear market leader in the Indian Paperboard and Packaging industry, a globally acknowledged pioneer in farmer empowerment through its wide-reaching Agri Business, the second largest Hotel Chain in India and a trailblazer in green hoteliering. ITC Infotech, a wholly-owned subsidiary, is one of India s fast-growing IT companies in the mid-tier segment. ITC s Agri-Business is one of India s largest exporters of agricultural products. The company s e-choupal initiative has enabled Indian agriculture significantly enhance its competitiveness by empowering Indian farmers through the power of the Internet. This transformational strategy has already become the subject matter of a case study at Harvard Business School apart from receiving widespread global acclaim. Acknowledged as a global exemplar in sustainability, ITC is the only enterprise in the world, of comparable dimensions to be carbon-positive, water-positive, and solid waste

2 recycling positive. A testimony to its commitment to a low carbon growth path - over 41 % of the total energy requirements of ITC is met from renewable sources. All ITC s premium luxury hotels are LEED (Leadership in Energy and Environmental Design) Platinum certified making it the greenest luxury hotel chain in the world. ITC s Paperboards and Paper business is an icon of environmental stewardship. ITC s production facilities and hotels have won numerous national and international awards for quality, productivity, safety and environment management systems. ITC was the first company in India to voluntarily seek a corporate governance rating. Robust all round performance in December 2013 quarter despite challenging environment During the quarter ended December 2013, net sales increased 13% to Rs crore driven primarily by FMCG and Paper Business. The cigarette sales was up by 13% to Rs crore, FMCG by 17% to Rs crore, Hotel business grew by 2% to Rs crore, agri-business by 10% to Rs crore and Paper & Paperboard by 18% at Rs crore. OPM inclined 57 bps to 37.6% which took OP up 15% to Rs crore. Other income increased 19% to Rs crore and interest cost decreased 64% to Rs 9.14 crore. As depreciation increased 10% to Rs crore, PBT grew 16% to Rs crore. The total tax outgo inclined by 17% to Rs crore. The effective tax rate was stagnant at 30.6%. The net profit has increased by 16% to Rs crore due to top-line growth. Nine months performance is also robust For the nine months ended December 2013, sales increased 11% to Rs crore. OPM improved 190 bps to 38.5% which took OP up 17% to Rs crore. Other income has increased 23% to Rs crore. There was interest income of Rs 6.58 crore against interest expense of Rs crore. As depreciation grew higher by 12% to Rs crore, PBT rose 19% to Rs crore. Total tax outgo increased 19% to Rs crore. Finally, net profit grew 19% to Rs crore Segment Results - Except Hotels, all segment business grew in double digit FMCG-Cigarette Standalone net sales for Q3 FY14 grew by 13% to Rs crore contributing 43% of revenues. Profits before interest and tax (PBIT) margins of the division inclined by 340 bps to 64.4%. PBIT grew by 19% to Rs crore. The segment accounted for 84% of total PBIT. Standalone net sales for 9M FY14 grew by 10% to Rs crore contributing 42% revenues. Profits before interest and tax (PBIT) margins of the division inclined by 560 bps to 65.6%. PBIT grew by 20% to Rs crore. The segment accounted for 84% of total PBIT. ITC has scaled up FMCG business with expansion of distribution and improved its profitability led by operating leverage. This trend is expected to continue as ITC betters geographical footprint. In view of the positive longterm outlook for the Indian Hotel industry, the company continues to sustain its investment-led growth strategy. The company also invested in a newly formed wholly-owned subsidiary incorporated in Sri Lanka which acquired a prime plot of land in Colombo on a 99- year lease from the Government of Sri Lanka 2

3 Other FMCG businesses This business registered a healthy revenue growth. Segment Profits at Rs. 10 crore was driven by enhanced scale and improvement in operating leverage. Sales for Q3 FY14 showed a growth of 17% to Rs crore despite a marked slowdown in consumption expenditure. The PBIT stood at Rs crore on the back of enhanced scale and improvement in profitability. Sales for 9M FY14 showed a growth of 17% to Rs crore. The loss before interest and tax stood at Rs crore. Branded Packaged Foods businesse posted robust growth in revenues and enhanced market standing across categories by leveraging a portfolio of differentiated and innovative products. In the Staples, Spices and Ready-to-Eat Foods business, 'Aashirvaad' atta sustained its high growth trajectory and consolidated its leadership position across markets. The premium variants - 'Multigrain' and 'Select' continued to perform well. In the Bakery and Confectionery Foods business, the recently launched 'Sunfeast Delishus' gourmet cookies and 'Candyman Jellicious' in the jelly segment were extended to target markets and garnered increasing consumer franchise. The business also sustained its leadership position in the cream biscuits segment. The Snack Foods business recorded strong growth during the quarter with the recently launched region specific variants gaining traction with consumers. In the Instant Noodles category, 'Sunfeast Yippee!' grew at a rapid pace gaining consumer franchise. During the quarter, the business also launched a highly innovative 'tricolour pasta' format in 2 exciting variants. The product has received encouraging consumer response in launch markets. The Personal Care Products business continued to make steady progress in the fast ]growing. Deodorants category with the 'Engage' range of deodorants continuing to receive good response from consumer. The Education & Stationery Products business consolidated its position as the leading player in the Indian stationery market driven by its flagship brands 'Classmate' for the student community and 'Paperkraft' for office and executive requirements. Hotels Business Its Hotels Business recorded significant improvement in profitability aided by superior performance by ITC Grand Chola. The hospitality sector continued to be adversely impacted by the weak economic conditions and high levels of room inventory in key Indian cities leading to a relatively weak pricing scenario. Consequently, growth in Segment Revenues remained muted. Sales for Q3 FY14 grew 2% to Rs crore. PBIT margin has increased 180 bps to 19.7%. As a result, PBIT increased 12% to Rs 62.2 crore. In line with strategy of expanding presence in an asset-light manner, the business commenced providing operating services at 3 properties 2 in Kerala and 1 in Chandigarh under the WelcomHotel brand during the year. Along with the 390 room WelcomHotel, Dwarka which was operationalised in August 2013, the business has added aprrox. 650 rooms to its national footprint during the year through the management contract route. Construction activity of the new properties at Kolkata, Hyderabad, Bengaluru and at the Classic Golf Resort near Gurgaon are progressing as per plans ITC continues to focus on the value-added product segment in which it is a clear market leader. The market for value-added paperboard is expected to grow faster at a compound annual growth rate of 12% driven by higher demand for branded packaged products in the FMCG and Pharma sectors, increasing number of product categories catering to aspirational lifestyles, higher rural demand, higher penetration of organized retail ITC cigarette volumes have been tracking a downward trend due to consistent price hikes. The trend improved sequentially in December 2013 quarter as price hikes were absorbed. 3

4 Sales for 9M FY14 grew by 7% to Rs crore. PBIT has decreased by 18% to Rs crore. This division contributed 1% to total revenue. Agri business Profit for the agri business was driven by higher realisation and superior mix during the quarter. This division registered a increase in the standalone net sales of 10% to Rs driven by higher realisation and superior mix. PBIT margin inclined by 90 bps to 11.5%. The PBIT increased by 19% to Rs crore. This division contributed around 19% to total revenue and 6% to total PBIT. This division registered a rise in the standalone net sales of 8% to Rs crore for 9M FY14. PBIT margin saw an incline of 70 bps to 12%. The PBIT increased by 14% to Rs crore. This division contributed around 21% to total revenue and 8% to total PBIT. Paperboard, paper & packaging Sales of the Paperboard, paper & packaging division grew on the back of recent capacity additions in paperboards and packaging. Price and cost control actions partially mitigate the impact of steep hike in input prices. Sales were up 18% at Rs crore driven by recent capacity additions in paperboards and packaging. Price and cost control actions partially mitigate the impact of steep hike in input prices. PBIT margin has declined by 310 bps to 18.4%. As a result, PBIT inclined by just 1% to Rs crore. This division contributed around 13% to total revenue and 7% to total PBIT. The net sales have witnessed growth of 13% to Rs crore for 9M FY14. PBIT margin has declined by 480 bps to 19.6%. As a result, PBIT declined 9% to Rs crore. This division contributed around 13% to total revenue and 8% to total PBIT. The company has scaled up its FMCG business ITC has scaled up FMCG business with expansion of distribution and improved its profitability led by operating leverage. This trend is expected to continue as ITC betters geographical footprint. The size of the Indian FMCG industry is estimated at around Rs crores representing nearly 2.5% of the country s GDP. The industry has tripled in size over the last 10 years and has grown at approximately 17% CAGR in the last 5 years driven by rising income levels, increasing urbanisation, strong rural demand and favourable demographic trends. These growth drivers, coupled with the low levels of penetration and per capita usage in India, are expected to result in robust industry growth in excess of 15% per annum over the medium-term. ITC continues to rapidly scale up its new FMCG businesses leveraging its institutional strengths viz. deep consumer insight, proven brand building capability, a deep & wide distribution network, strong rural & agri-sourcing linkages, paper and packaging expertise and cuisine knowledge. The new FMCG businesses comprising Branded Packaged Foods, Personal Care Products, Education and Stationery Products, Lifestyle Retailing, Incense Sticks (Agarbattis) and Safety Matches have grown at an impressive pace over the past several years, crossing Rs 7000 crore mark last FY. Its new FMCG businesses have been rated to be the fastest growing among top consumer goods companies operating in India. While ITC continues to take pre-emptive price hikes, the coming two quarters of March and June 2014 can be expected to be strong as excise rates are unlikely to go up till the FY15 budget is presented post central elections in Sales of the Paperboard, paper & packaging division grew on the back of recent capacity additions in paperboards and packaging. Price and cost control actions partially mitigate the impact of steep hike in input prices. 4

5 ITC s Branded Packaged Foods businesses continued on a high growth trajectory recording impressive growth in market shares and enhanced market standing across segments. The businesses accelerated investments in distributed capacities and capabilities to meet anticipated growth and develop a differentiated and distinctive range of products. Significant investments in R&D and product development coupled with deep consumer insight have enabled launch of successful innovative products catering to the varied regional tastes and preferences of consumers across the country. Its products continue to be best-in-class in terms of product quality. Its Personal Care Products business continued to gain consumer franchise aided by a slew of new product launches in the Personal Wash, Skin Care, Face Wash and Deodorants categories. The business continues to leverage the umbrella brands, namely, Essenza Di Wills, Fiama Di Wills, Vivel and Superia and is focused on addressing various consumer benefits with the introduction of new variants. Its Personal Care Products business continues to grow at a fast clip, distinctly ahead of industry despite competitive pressures from entrenched players largely due to a combination of innovative and differentiated offers and by leveraging the distribution network of the company to reach target consumers. The Stationery business recorded robust growth in revenues during the year, consolidating its position as the leading and fastest growing player in the Indian Stationery market. Its flagship brands - Classmate for the student community and Paperkraft for office and executive requirements -continue to gain increasing consumer franchise. Hotels business continues to be rated amongst the fastest growing hospitality chains The company s Hotels business continues to be rated amongst the fastest growing hospitality chains with 93 properties at 64 locations in India operating under 4 brands ITC Hotel at the luxury end, WelcomHotel in the 5 star segment, Fortune in the mid market to upscale segment and WelcomHeritage in the heritage leisure segment. In addition, the business has licensing and franchising agreements for two brands The Luxury Collection and Sheraton with the Starwood Hotels & Resorts. In view of the positive long-term outlook for the Indian Hotel industry, the company continues to sustain its investment-led growth strategy. The company also invested in a newly formed wholly-owned subsidiary incorporated in Sri Lanka which acquired a prime plot of land in Colombo on a 99-year lease from the Government of Sri Lanka, for developing a mixed-use project including a 5-star luxury hotel. Further, several new projects, including joint ventures and management contracts, are on the anvil to rapidly scale up the business across all brands. Paperboard, paper & packaging division is focused on the value-added product The global paper market continues to witness a structural shift with emerging economies, particularly in Asia such as China and India, driving the demand growth. Personal Care Products business continues to grow at a fast clip, distinctly ahead of industry despite competitive pressures from entrenched players largely due to a combination of innovative and differentiated offers and by leveraging the distribution network of the company The company s Hotels business continues to be rated amongst the fastest growing hospitality chains with 93 properties at 64 locations in India operating under 4 brands 5

6 The domestic paperboard industry is expected to grow at around 7.5% per annum over the medium-term. The company has been consolidating its preeminent position in the industry through new product launches like Carte Lumina with best-in-class whiteness suited for high-end FMCG and overthe-counter products and Nanobev for the small paper cups segment. ITC continues to focus on the value-added product segment in which it is a clear market leader. The market for value-added paperboard is expected to grow faster at a compound annual growth rate of 12% driven by higher demand for branded packaged products in the FMCG and Pharma sectors, increasing number of product categories catering to aspirational lifestyles, higher rural demand, higher penetration of organized retail and increasing salience of packaging in driving brand awareness. Towards this end, the company successfully commissioned a state-of-the-art and highly energy efficient paper machine with an installed capacity of over 1 lakh tonnes per annum at the Bhadrachalam plant in FY With this, the total capacity of the Bhadrachalam plant stands at over 5.5 lakh tonnes per annum, thereby sustaining its position as the single largest integrated pulp and paperboard/ paper unit in the Indian industry. The company has also invested in a new 25 MW Turbine Generator and 130 tonnes per hour (TPH) Boiler to meet the energy requirements of this expansion. The Writing and Printing paper segment, currently estimated at 3.8 million tonnes per annum, is projected to grow at a compound annual growth rate of around 7% over the medium term. Growth in the value-added writing and printing paper segment will continue to be fuelled by initiatives like Sarva Shiksha Abhiyan and Right of Children to Free and Compulsory Education as well as by rising literacy levels, changing demographic profiles and GDP growth. The business, with its strong forward linkages with the company s Education and Stationery Products, has emerged as a leading player in this segment. Its Packaging and Printing business provide contemporary and superior packaging solutions facilitated by its state-of-the-art technology and processes. The business provides strategic support to the company s FMCG businesses through innovative packaging solutions, faster speed-to-market for new launches and security of supplies in addition to delivering benchmarked international quality at competitive costs. The business continues to leverage its multiple packaging platforms to offer a wide range of packaging solutions and expand business both in domestic and export markets. The company continues to be a leading supplier of value-added packaging in cartons and flexibles. Performance in cigarettes can pick up near term ITC cigarette volumes have been tracking a downward trend due to consistent price hikes. The trend improved sequentially in December 2013 quarter as price hikes were absorbed. While ITC continues to take pre-emptive price hikes, the coming two quarters of March and June 2014 can be expected to be strong as excise rates are unlikely to go up till the FY15 budget is presented post central elections in The global paper market continues to witness a structural shift with emerging economies, particularly in Asia such as China and India, driving the demand growth. Its Packaging and Printing business provide contemporary and superior packaging solutions facilitated by its state-ofthe-art technology and processes 6

7 Valuation For FY 14, we expect the company to register net sales and PAT of Rs crore and Rs crore respectively. For FY 15, we expect the company to register net sales and PAT of Rs crore and Rs crore. This gives EPS of Rs 11.0 for FY 14 and Rs 12.9 for FY 15. At current market price of Rs 340, the share trades at 26.4 times its expected FY 15 earnings. ITC has strong resilience in its core cigarette business. It is gaining traction in non cigarette businesses as well, making it a well diversified growth company. The company is expected to report consistent growth as it capitalizes on rising income levels, increasing urbanisation, strong rural demand and favourable demographic trends though its strong presence in diversified segments and leading brands. The company offers one of the best earnings predictability. Given the MNC parentage and the leadership status, the company will continue to command higher P/E. We apply a P/E of 32 to the projected FY 2015 EPS of Rs 12.9 to arrive at target price of Rs 410. The key risks are continued high inflation and poor consumer sentiments and regulatory and taxation related adverse moves for its Cigarette business. It is gaining traction in non cigarette businesses as well, making it a well diversified growth company ITC : RESULTS 1312 (3) 1212 (3) VAR. (%) 1312 (9) 1212 (9) VAR. (%) 1303 (12) 1203 (12) VAR. (%) Sales OPM (%) OP Other inc PBIDT Interest PBDT Dep PBT Tax PAT EPS *Annualised on diluted capital of Rs crore. Face Value: Re 1 per share. Var. (%) Exceeding 999 has been truncated to 999. LP: Loss to Profit, PL: Profit to Loss. EO: Extraordinary items. Figures in Rs crore. (P): Projections. Source: Capitaline Databases 7

8 ITC : SEGMENT RESULTS SEGMENT SALES 1312(03) 1212(03) VAR. % TO 1312(09) 1212(09) VAR. % TO 1303(12) 1203(12) VAR. % TO (%) TOTAL (%) TOTAL (%) TOTAL FMCG-cigarette others Total FMCG Hotels Agri business Paperboard, paper & packaging Total Less : Inter Segment sales Net Sales FMCG-cigarette others Total FMCG Hotels Agri business Paperboard, paper & packaging TOTAL Figures in Rs crore Source: Capitaline Database 8

9 FINANCIAL STATEMENT PROFIT & LOSS A/C-STANDALONE - RS. CRS FY09 FY10 FY11 FY12 FY13 Net Sales Y-o-Y 15.6% 18.0% 17.5% 19.2% Total Expenditure Raw Materials Stock Adjustments Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Administration Expenses Miscellaneous Expenses EBIDTA Margin 28.4% 34.8% 31.6% 34.2% 33.8% Depreciation EBIT Interest Other Income PBT Tax Fringe Benefit Tax Deferred Tax PAT Extraordinary Items Adjusted PAT Margin 20.1% 21.8% 22.0% 23.1% 23.5% EPS (Rs.) Adjusted EPS (Rs.) Book Value (Rs.) Adjusted Book Value (Rs.) CASH FLOW (Rs in crore) FY09 FY10 FY11 FY12 FY13 Cash Flow Summary Cash and Cash Equivalents at Beginning of the year Net Cash from Operating Activities Net Cash Used in Investing Activities Net Cash Used in Financing Activities Net Inc/(Dec) in Cash and Cash Equivalent Cash and Cash Equivalents at End of the year Year

10 BALANCE SHEET (Rs in crore) FY09 FY10 FY11 FY12 FY13 SOURCES OF FUNDS : Share Capital Reserves Total Total Shareholders Funds Secured Loans Unsecured Loans Total Debt Other Liabilities Total Liabilities APPLICATION OF FUNDS : Gross Block Less : Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Deferred Tax Assets Deferred Tax Liability Net Deferred Tax Other Assets Total Assets Contingent Liabilities

11 RATIO ANALYSIS FY09 FY10 FY11 FY12 FY13 Key Ratios Debt-Equity Ratio Long Term Debt-Equity Ratio Current Ratio Turnover Ratios Fixed Assets Inventory Debtors Total Asset Turnover Ratio Interest Cover Ratio PBIDTM (%) PBITM (%) PBDTM (%) CPM (%) APATM (%) ROCE (%) RONW (%) Payout (%) Disclaimer : This document has been prepared by M/s Latin Manharlal Securities Pvt. Ltd. and Capital Market Publishers India Pvt. Ltd. (the company) and is being distributed in India by Latin Manharlal Securities Pvt. Ltd. The information in the document has been compiled by the research department. Due care has been taken in preparing the above document. However, this document is not, and should not be construed, as an offer to sell or solicitation to buy any securities. Any act of buying, selling or otherwise dealing in any securities referred to in this document shall be at investor s sole risk and responsibility. This document may not be reproduced, distributed or published, in whole or in part, without prior permission from the Company. Copyright Capital Market Publishers India Pvt. Ltd and Latin Manharlal Securities Pvt. Ltd. 11