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ITC Ltd (ITC IN) Summary

Core Content

ITC Ltd is a leading Indian company with a current share price of INR331 and a target price of INR382, indicating a 15% upside. The company's market capitalization is USD 41.5B, with an average daily trading volume (ADTV) of USD 34M. The report maintains a "BUY" recommendation, suggesting that the current 22.3x price-to-earnings (PER) ratio is reasonable and offers an attractive entry price, especially considering the five-year average PER of 26x.

Main Points

• Earnings Growth:

  • 1QFY16 net profit was INR22.7b, slightly below expectations due to a 16% drop in cigarette volumes.
  • Earnings are expected to grow by 9% YoY in FY16 and 14% YoY in FY17, primarily driven by improved cigarette EBIT.
  • Cigarette EBIT is projected to increase by 11% in FY16 and 15% in FY17, with a moderation in volume drop to single digits in 2HFY16.
  • Cigarette volumes are expected to drop 12% in FY16 and increase by 1% in FY17.

• Non-Cigarette Businesses:

  • Agri business showed strong performance, with a 16% YoY increase in profits, driven by exports of high-margin leaf tobacco.
  • FMCG and Hotels also showed reasonable performance, with FMCG sustaining revenue growth and Hotels recording a 16% YoY revenue increase.

• Illicit Trade and Taxation:

  • The illegal cigarette trade in India has risen from 5% in FY07 to 20% in FY15, causing significant tax revenue losses.
  • The government is likely to implement moderate tax increases in the next two to three years to control illicit trade, which could be a positive catalyst for ITC.

• Performance and Valuation:

  • ITC's performance was below expectations in the past nine months, but the report expects recovery in the next nine months of FY16.
  • The current PER is below the five-year average, suggesting a potential undervaluation.
  • The SOTP-based target price of INR382 implies a five-year average PER of 26x for FY17.

Key Financials

Key Data

Earnings and Profitability

Outlook

• The report anticipates stabilization in cigarette volumes and price increases, which should support profit growth in the coming quarters.
• Non-cigarette businesses are expected to benefit from the economic revival, contributing to overall earnings recovery.
• The moderation in tax increases is a potential catalyst for ITC, helping to control the illicit cigarette trade and reduce tax losses.
• ITC's cigarette margins have historically expanded despite duty increases, suggesting resilience in the business model.

Summary

ITC is at an inflection point with the potential for earnings recovery and improved performance in the coming quarters. The company is expected to benefit from moderation in tax increases, which could help control the illegal cigarette trade and reduce tax losses. While the 1QFY16 earnings missed estimates, the report is optimistic about the future, with forecasts for improved EBIT and earnings growth. The current valuation appears attractive, and the "BUY" recommendation is maintained based on the company's strong fundamentals and potential for recovery.