Maintain buy on ITC, raise target to Rs 413

Updated: Jul 31 2014, 07:13am hrs
We maintain our buy rating on ITC and marginally raise our target price to R413 (earlier R411). We value the stock on an SoTP-based methodology of 28x FY16e cigarette profits.

While there are downside risks to growth given the broad-based slowdown in the sector, ITC's earnings are likely to be more resilient than peers. Our FY15-17e EPS forecasts undergo minor changes based on our assumptions.

ITC's cigarette net sales grew 19% y-o-y in Q1FY15, while segment profits grew 21% y-o-y (c.3% ahead of estimates). Volumes declined c.3% in Q1FY15, as demand in the regular-sized filter (RSFT) segment remained weak while the small-sized segment continued to gain traction. This trend could reverse with the excise duty changes in the latest Budget.

Given the delay in Budget announcement this year, the impact of excise duty hikes on earnings growth will likely be felt only from Q2FY15 onwards. As a result, we forecast slightly lower earnings growth (c.15% y-o-y) in the cigarette segment for nine months of FY15. Overall, we expect volumes to decline c.3% in FY15, but expect segment profits to grow c.17%, led by a 12-20% increase in prices.

ITC's FMCG revenues grew 11% y-o-y (3% below estimates), slower than recent trends. The segment reported losses in Q1FY15, reversing the profitability trend of the last two quarters. Given the weakness in the sector, we lower our revenue forecasts for the segment by c.3% over FY15-17e.