ITC has delivered largely an in-line performance in 3QFY18. While reported net revenues grew by 5.7% YoY to Rs96.7bn (vs. our estimate of Rs100.5bn), EBITDA increased by 10.4% YoY to Rs38.1bn (vs. our estimate of Rs37.4bn). Reported net profit surged by 16.8% YoY to Rs30.9bn (vs. our estimate of Rs28.3bn), mainly due to exceptional income of Rs4.1bn (Rs2.7bn post tax) pertaining to reversal of Entry Tax levied by Tamil Nadu following a favourable Supreme Court order. Adjusted for this, net profit came in line with our estimate.
We expect ITC to post 9.6% revenue and 10.8% earnings CAGR through FY17-20E. Based on expected EPS of Rs11.4, the stock currently trades at 24.2x FY20E earnings, which is at a 35% discount to sector multiples and 45% discount to Hindustan Unilever. Attractive valuation provides adequate margin of safety, in our view. Considering ITC as a value pick than a growth stock, we maintain our BUY recommendation on the stock with an SOTP-based Target Price of Rs320.
Cigarette Business Performance in line
Cigarette volumes for the quarter are estimated to have fallen by ~3-4% in line with our estimate compared to decline to the tune of 7% and 2% in 2QFY18 and 3QFY17, respectively. Cigarette EBIT grew by 7.8% YoY to Rs32.7bn. Notably, reported revenue growth is not comparable due to accounting changes post GST roll-out, as base quarter figures include Excise Duty. Segmental margins stood at 70.6% compared to 72.3% in 2QFY18. We expect sequential recovery in volumes in coming quarters, although forthcoming Union Budget would be the key event to watch out for.
Improved Growth Momentum in non-Cigarette Biz
Non-cigarette FMCG business posted revenue growth of 11.8% YoY (16.2% on comparable basis) to Rs28.7bn, while the business witnessed segmental profit of Rs470mn vs. 197mn loss in the base quarter. Revenue from Hotels segment grew by 9.2% YoY to Rs4bn, while segmental EBIT surged by 30% YoY to Rs548mn on the back of increasing room rates, F&B and higher operating leverage. Despite 4% YoY decline in revenue to Rs12.8bn, EBIT from Paperboard segment grew by 9% YoY to Rs2.7bn due to benign input costs. Revenue from Agri business fell by 22% YoY to Rs15.3bn due to limited trading opportunities, while segmental EBIT remained largely flat at Rs2.3bn.
Outlook & Valuation
Looking ahead, we believe that regulatory issues would continue to remain an overhang for ITC in the coming years. In spite of GST and Cess levy, the Central Government still has the right to separately impose Excise Duty on cigarettes, which could act as a spoiler. However, attractive valuations at 24.2x FY20E earnings provide adequate downside protection, in our view. Hence, we maintain BUY recommendation on the stock with a Target Price of Rs320.
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