Accumulate ITC - Other verticals push up growth pace - Elara Capital

• ITC
• Rating : Accumulate
• Target Price : INR200
• Upside : 17%
• CMP : INR171 (as on 29 October 2010)

Other verticals push up growth pace

Cigarette business puffs momentum up

After reporting a decline in the cigarette volume in Q1FY11, the company has shown a 2.7% QoQ a volume uptick in Q2FY11. On YoY basis, cigarette volume grew by ~4.5% and net sales by 16% to INR 25.5bn. We believe that the cigarette business would show a healthy growth on strong branding power and new product launches in the new 'micro filter' segment (length not exceeding 60 mm).

Dependence on cigarette biz for profitability decreases

The contribution of cigarette EBIT to the total business EBIT has gone down by 271bps YoY to 77.6% in Q2FY11. The historical low and high of cigarette EBIT contribution were at 80.2% in Q2FY10 and 90% in Q3FY09 respectively. We expect the lowering losses from the FMCG-others and improving scalability of other businesses like agri, hotel and paper would decrease the the dependence for profit on cigarette business further.

FMCG-others, hotel, agri business lead growth in other verticals

Net sales (ex-cigarette business) reported a robust growth of 20% YoY to INR25.1bn on a robust performance of other verticals like FMCG-others, hotel, agri and paper and packaging business.

Valuation and recommendation

The company has shown a forceful performance across business segments. After reporting a deline in cigarette volume in Q1FY11, the company has shown a 2.7% QoQ volume uptick in Q2FY11. We believe that the improving performance of all verticals would drive the stock upward going forward. At the current price, the stock is trading at 28.1x FY11E earnings of INR 6.1 and 25.1x FY12E EPS of INR 6.8. We maintain our 'Accumulate' rating on the stock with a 17% upside at a target price of INR200, arrived at by SOTP of its key businesses.

Source : Equity Bulls

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