Packaged foods: ITC?s packaged food sales increased 25% to R2,890 crore, with volume growth for the year at 9.1%. Wheat flour and sugar prices increased by 10% and 12%, respectively, for ITC. The company entered the noodles category through the launch of Sunfeast Yippee!, for which it has received encouraging response thus far. Its biscuits business posted significant growth, especially at the value-added end, with the company launching several new variants. ITC expects foods to post robust growth in FY12 despite inflationary pressures.

Personal care: ITC continues to launch new products under its soap and shampoo brands. Vivel and Superia soaps and shampoos have together reached an estimated 99 million households so far. The company entered fairness creams through Vivel Activ Fair and also launched a line of shower gels and bathing bars under the Fiama Di Wills brand. Production of personal care products was 45% higher in FY11.

Lifestyle retailing: Wills Lifestyle expanded to 73 exclusive stores in 40 cities and more than 150 shops-in-shops. It opened its first men?s luxury store aimed at the premium business consumer. John Players now has over 280 flagship stores and 1,100 multi-brand outlets. Rising cotton prices and the re-imposition of excise duty on branded apparel in this year?s Union Budget will exert inflationary pressure on costs in the coming year.?

Stationery business: Non-paper sales in the stationery business (Classmate brand) posted a 100% increase. Significant promotional activities in Papercraft and consolidation of Classmate?s leadership position resulted in strong growth for the division.

We expect FMCG Others Ebit losses to decline by 35% in FY12 due to rising profitability in processed foods on the back of strong volume growth and softening prices of key inputs.

Agri business: Agri business sales rose 22.9% to R4,750 crore and Ebit increased 26.5% despite lower leaf tobacco sales. Higher proportion of soya sales and focus on higher margin exports aided sales growth and margins.

Leaf tobacco: Global leaf tobacco sales increased 4%; in India, the tobacco crop increased by 14%, but prices remained firm. Volumes for ITC declined 10%, realisations remained largely flat (up 1%). ITC is in the process of commissioning additional capacities in Karnataka and reorganising the supply chain to lower cost.

Agri products: ITC benefited from a decline in global soya production and exported a larger proportion of soya bean and soya meal. During the year, 57% of consumption at the Haridwar processing plant was sourced locally.

E-choupal: The rural retailing business grew 87% due to an expanded product range and quicker product replenishment. FMCG product throughput increased by 40% in the e-Choupal network. We estimate 16% Ebit growth in agri business in FY12.

Hotels: ITC?s hotels business reported sales growth of 18%; Ebit increased 23% to R2,670 crore. We expect the hotels business to report 21% Ebit growth in FY12, as margins gradually recover to pre-FY10 levels.

Paper and paperboard: Paper and paperboard sales increased 13% (on account of higher realisations of value-added paper) to R3,510 crore; Ebit grew 20% to R820 crore. Printed material volumes increased by 9% whereas paperboard volumes declined 1% (owing to lack of capacity and higher internal sales).

The domestic paperboard industry grew by 8% in FY11 (7% in FY10) and is likely to grow at 8% CAGR over the next five years. We expect value-added paperboards to grow at 15% due to rising demand from pharma, FMCG, liquid packaging, apparel and consumer durables.

ITC maintained market leadership in paperboards, with 26% value share of the domestic paperboard market (2.3 million tonnes). It is setting up another machine (0.1 million tonnes) that will be commissioned in Q1 FY12.

The Indian writing and printing paper industry (3.3 million tonnes) has grown by 7% in FY11 and is expected to grow at 8% CAGR over the next five years. High quality copier and fine paper is expected to grow at 16% CAGR. ITC has 65% share in the cigarette tissue market and 26% share in the d?cor market.

Increasing target price to R216; maintain ?buy?

We remain positive on ITC?s robust business model, led by high cash flows and its high RoE generating cigarette business. Non-cigarette businesses are also set to contribute to growth, with FMCG losses expected to decline, and paper, agri and hotels businesses on a healthy growth path. Given the limited capex requirements (R1,000-1,500 crore) and huge cash flow generation (R5,200 crore in FY11), increase in dividend payout is likely.

We are assigning higher P/E multiple of 25x FY13 for cigarette business to factor in, (1) robust demand outlook, (2) high entry barriers given ban on FDI in tobacco, (3) dominant market share of ~80% and (4) strong pricing power.

We believe ITC will be able to garner dominant share of incremental profits enabled by its strong competitive positioning in the Indian cigarette industry. We estimate 20.5% PAT CAGR over FY11-13. We are increasing our target price from R200 to R216. The stock trades at 23.6x FY12E EPS of R7.80 and 20.1x FY13E EPS of R9.20. Buy with a target price of R216, 17% upside.

Motilal Oswal

Securities Ltd