ITC beats estimates, scrip hits all-time high

Stock gains over 2% on strong fundamentals; Morgan Stanley reiterates ?overweight? rating

Share of ITC, India’s largest cigarette manufacturer, soared to its all-time high on Friday after the company announced its September quarter earnings that beat analysts? expectations by a significant margin.

The stock gained nearly 3% on BSE to its life-time high of R299.20 on Friday after the company’s reported revenue growth of 19.6% year-on-year in the three months ended September. Analysts had expected ITC to report a growth of 14-15% in its quarterly revenue.

Operating profit (EBIT) and net profit grew 20.3% and 21%, respectively, from the year-ago period against analysts’ expectations of a 14% and 16% increase. The stock eventually ended at R297.50, up R6.10 or 2.09% on BSE, with more than 14.8 lakh share being traded on the BSE and NSE.

Analysts said a steep increase in cigarette prices largely compensated flat growth in cigarette volumes. However, it was the strong performance of the non-cigarette business that kept the growth ticking ? for instance, ITC’s revenue from agri business and paperboard business grew 41% and 6%, respectively. The consumer staples business, on other hand, grew 26% year-on-year in Q2 and helped ITC reduce losses at its consumer division to R30.3 crore in the September quarter from R55.9 crore last year.

Swiss global financial services company, UBS described ITC’s Q2 results as ?a stellar performance? and reiterated a ‘buy’ rating, while Karvy Institutional Equities initiated a ‘buy’ rating on Thursday on the assumption of strong cash flow based on ITC’s past performance and low peer threat on its high margin cigarette business.

US financial services major Morgan Stanley also reiterated its ‘overweight’ rating and stated that unparalleled visibility for earnings growth should continue to support valuations. ?Plain packaging of cigarettes is a risk for global tobacco companies, but we are more focused on success of the 64mm cigarette segment combined with ongoing improvement in RoE of the non-cigarette business, which in our view should continue to drive stock outperformance,? said Morgan Stanley analysts Nillai Shah, Girish Achhipalia and Sanath Sudarsan in their report.

Analysts said that fundamentals of the company continued to look strong on expectations the volume growth in the cigarette business would further improve in the second half of FY13 and the consumer staples business would likely break-even in the fourth quarter.

UBS analyst Sunita Sachdev was of the view that consumers are expected to absorb price increases over time, while low-end consumers would move into the micro filter segment (sub-65mm) as ITC dominates the domestic cigarette market, thereby keeping the volume growth intact.

ITC is the leading cigarette manufacturer in India with a 67% share of the market by volume and 83% by value.

However, experts maintained caution and advised buying on every price correction as the stock was quoting at about 36x the current year’s earnings. Shares of ITC have given returns of nearly 50% from the beginning of the current calendar year and almost 100% in the previous two years.