Buy ITC, target Rs 364: Prabhudas Lilladher

Prabhudas Lilladher has a buy call on ITC with a target price of Rs 364.

The current market price of ITC is Rs 281.70.

Time period given by the brokerage is one year when ITC price can reach the defined target.


Investment rationale by the brokerage-
ITC reported a steady quarter with broad-based growth across segments. ITC trades at 22.4xFY21 EPS, 35-40 per cent discount to our coverage universe, which limits downside in the stock. We believe that stable cigarette taxation regime can accelerate volume growth and re-rate the stock. Retain “Buy” with SOTP based target price of Rs 364.

Cigarettes volumes up nearly 7.5 per cent; EBIT up 9.1 per cent. Mix remains stable has stabilized with 64mm segment at 37-38 per cent of volumes. Stability in GST rates remains key for a sustained recovery in cigarette volumes; our estimates factor in 5 per cent cigarette volume growth for FY18-20. Margins have seen a hit of 50bps as higher cost leaf tobacco was consumed and increase the salience of Capsule filters in the sales mix. ITC has increased prices of Flake filter in the RSFT segment by Rs1, and prices of 2 brands in 64mm segment by 50paise each.

FMCG EBIDTA margin at 5.4 per cent: Sales grew 11.5 per cent, excluding lifestyle it grew by 12.5 per cent. EBITDA grew by 41.6 per cent to Rs1.73bn. EBIT at Rs766.6mn increased 63.1 per cent with market share enhancement in most of the categories. Foods, personal care and stationary have reported improved performance while Lifestyle retailing remains a drag. Q4FY19 is expected to be a better quarter due to marriage season. We expect Personal care to break even at EBITDA level in 1QFY20, though lifestyle is expected to remain a drag.

Hotels margin up on higher ARR and Occupancy levels: EBIT increased 10.1 per cent on 11.7 per cent increase in sales despite 20bps margin expansion. Improvement in ARR (4-5 per cent) and higher occupancy levels (more than 60 per cent) was offset by the commencement of 2 new hotels in Goa and Kohenur.

Paperboard and Paper sales grew 20.5 per cent as EBIT increased 23.8 per cent on 60bps margin expansion led by lower input costs, higher in-house pulp and recovery in cigarette volumes. The rebuild of 1.5lakh ton machine for VA paperboards has increased the profitability and will continue to do so in coming periods.

Agribusiness sales increased 25.7 per cent however, EBIT declined by 14.8 per cent on 490bps margin decline. Firm leaf tobacco prices damaged AP crop and lower export incentives impacted margins and profits. INR depreciation has restored some competitiveness in leaf tobacco exports.