Improving volumes and and pricing in cigarette business are key catalysts; valuation is inexpensive; ‘Add’ rating maintained.
Q4 was broadly an in-line quarter led by modest performance in core cigarette business (8% volume growth/2-year CAGR at 2.5% and 10% Ebit growth), sustained profitability enhancement in FMCG and broad-based robust growth in other businesses. Punitive taxation notwithstanding, we believe, improving volume trajectory and pricing action in core cigarette business remain key catalysts. Inexpensive valuations (our reverse math suggests core cigarette business adjusted for other parts in our SoTP valuation trades at 21x Mar-21e earnings) and undemanding expectations lend additional comfort. Our estimates remain broadly unchanged; we have Add rating on the stock with TP unchanged at `325 based on our SoTP valuation (implied blended P/E of 26x Mar-21 EPS).
Q4FY19— improved performance in cigarettes; FMCG and hotels sustain profitability enhancement
Net revenue grew 13% y-o-y to Rs 119.9 bn (2% ahead of our estimate led by higher-than-expected growth in cigarettes and hotels), Ebitda rose 10% y-o-y to `45.7 bn (1% below our estimate) and recurring PAT was up 19% y-o-y to Rs 34.8 bn (8% ahead of our estimate aided by sharp 43% y-o-y jump in other income). Ebitda margin contracted 100 bps y-o-y to 38.1% largely dragged by 70 bps GM contraction and 60 bps jump in staff cost.
Among segments, (i) core cigarette business delivered 11% revenue growth (led by 8% volume and 3% price/mix-led growth—as per our estimate, volume was a shade higher vs. our estimate of 6% growth) and 10% Ebit growth (dragged by 70 bps compression in Ebit margin), (ii) FMCG business posted modest performance in challenging environment with 7% revenue growth (10% adjusted basis, reported growth dragged by restructuring of the Lifestyle Retailing Business and pipeline calibration in education and stationery products business) and 43% Ebit growth on sustained improvement in profitability and (iii) all other businesses posted healthy revenue/Ebit growth (both 15%) led by beat in hotels and agri-business, while paperboards was marginally below estimates.
Cigarettes sales grew 11% y-o-y to Rs 54.9 bn (a shade above our estimate); we estimate this is driven by 8% volume growth (higher vs. our estimate of 6% volume growth indicating 2-yr CAGR of 2.5%—equates to modest acceleration q-o-q) and ~3% price/mix-led growth. Cigarette Ebit grew 10% (shade above our estimate), as Ebit margin compressed 70 bps to 70.3% – partly dragged by escalation in input costs, higher growth in DSFT segment (64 mm) and increased salience of capsule cigarettes in the sales mix (now 7% of sales).
FMCG sales grew ~7% y-o-y to Rs 32.7 bn (3% below our estimate) – revenue growth was partially impacted by ongoing restructuring of the Lifestyle Retailing Business and pipeline calibration in education and stationery products business. Segment Ebit margin improved 100 bps y-o-y and 160 bps q-o-q to 4%, resulting in `1.3 bn Ebit for the segment (10% ahead of our estimate, up 43% y-o-y).