ITC - 3QFY12 Results Update - Motilal Oswal

ITC's 3QFY12 results were above estimates with Adj PAT growth of 22.5% at INR17b (est INR 16.4b) led by higher other income. Total revenues increased 14.2% to INR 62.5b (est INR 64.7b), led by an impressive 24.5% sales growth in FMCG and 17% increase in cigarettes. Cigarette volumes increased ~5%, while FMCG losses declined 36% YoY to INR468m. EBITDA grew 18% to INR23.8b (est INR24.2b); margin expanded 120bp to 38.1% (est 37.4%). Other income increased to INR2.9b (up 48%, est INR1.9b) due to sale of investments in Agrotech Foods and VST Inds shares (estimated profit of ~INR680m). Adj PAT grew 22.5% to INR17b (est 16.4b) as lower FMCG losses and higher other income boosted growth.

10th quarter of 20%+ earnings growth; Strong pricing power and robust growth model makes ITC best placed; Maintain Buy

- ITC has posted 10th consecutive quarter of 20%+ earnings growth.

- We believe concerns over excise duty hikes are overplayed as ITC's cigarette business profits have grown at 15% CAGR since 2001 in spite of steep increase in duties in the past; we expect this trend to continue.

- Payout ratios are likely to settle at higher levels as compared to historical average of 45%, given limited capex (~INR 10b annually) and INR 50b+ cash flow generation expected in FY12. Higher payouts will not only improve return ratios but also make the stock more attractive.

- We marginally revise our estimates upwards to factor in higher profit on sale of investments and a lower tax rate. We expect ITC to report 20% PAT CAGR over FY11-13 as the company's diversification strategy plays out with all divisions contributing to growth.

- ITC remains our preferred Consumer pick due to high entry barriers and strong pricing power in cigarette business. Buy with target price of INR230.

Source : Equity Bulls

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