ITC :- Recommendation: Buy

ITC
Recommendation: Buy
Price target: Rs253

With Stop Loss : 223
Minor Hurdle : 238-240 

Current market price: Rs232

Price target revised to Rs253

Result highlights

• Q4FY2012 results-ahead of expectations: ITC's Q4FY2012 results are ahead of expectations largely on account of a higher than expected other income during the quarter. The above 20% year-on-year (Y-o-Y) growth in the non-cigarette fast moving consumer goods (FMCG) business along with a 75% decline in the losses of the business at the PBIT level was the key highlight of quarter. The cigarette business' margin improved by 233 basis points year on year (YoY) to 31.1% during the quarter. The volume growth of the cigarette business stood at 4.5% YoY (in line with our expectation). The hotel business' performance was a disappointer with a drop of 4.8% YoY in the revenues and a 420-basis-point contraction in the PBIT margin to 29% during the quarter. Overall, it was a quarter of stable operating performance but a higher other income fuelled the bottom line growth.
• Performance snapshot: The income from operations (including the other operational income) grew by 16.9% YoY to Rs6,954.5 crore, ahead of our expectation of Rs6,780.1 crore for the quarter. The higher realisation in the cigarette business helped the gross profit margin (GPM) to improve by 118 basis points YoY to 59.7% while the operating profit margin (OPM) improved by 51 basis points YoY to 32.5% (which was lower than our expectation of 34.4%) in Q4FY2012. Hence the operating profit grew by 18.8% YoY to Rs2,263.3 crore. The other income grew by 80.7% YoY to Rs207.9 crore. The strong growth in the other income was largely on account of higher yields on investments. This led to a strong growth of 26% YoY in the bottom line to Rs1,614.2 crore.
• Outlook and valuation: We have marginally revised upwards our earnings estimates for FY2013 and FY2014 by 1% and 2% respectively to factor in the slightly higher than expected other income. In line with the upward revision in the earnings estimates our price target stands revised at Rs253. At the current market price the stock trades at 25.1x its FY2013E earnings per share (EPS) of Rs9.3 and 20.9x its FY2014E EPS of Rs11.1. The long-term growth prospects of the company are intact with the non-cigarette FMCG business delivering a strong performance and the company focusing on enhancing its presence in the hotel business. In view of the strong earnings visibility, profitability less sensitive to input cost pressure, and strong balance sheet we maintain our Buy recommendation on the stock.  
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