ITC: FMCG biz set to break even

Last Updated: Thu, Dec 27, 2012 05:47 hrs

As the year draws to a close, ITC comes into focus. The company, over the last couple of years, is known to have increased prices of its key brands before the Union budget is presented in Parliament, to offset a hike in duty. This year, too, the market is expecting ITC to hike prices of its Classic and Navy Cut brands in the fourth quarter, good for earnings.

Even if ITC retains prices at current levels, its earnings before tax from the cigarette division would be strong, as it has increased prices by 23 per cent across its cigarette portfolio, while the duty has been hiked by 21 per cent in FY13. According to Deutsche Bank Markets Research, despite the strong price increases, ITC's cigarette volumes have remained resilient, underscoring the strength of the franchise. However, analysts don't rule out a modest volume growth in the cigarette business over FY13 and a value-led growth of 16 per cent. Since the new 64 mm cigarette launch has been successful, the market expects growth to pick up and the product mix to improve. Religare Institutional Research expects this category to contribute three per cent to total cigarette volumes.

The other piece of good news is that ITC reported a strong growth in its food portfolio during the second quarter of the this financial year, while competitors saw much slower or flat growth. Its biscuits business has grown 20 per cent, well ahead of the market, and the noodles brand, Yippee, has gained 200-300 basis points in market share over 12 months. In the soaps category, too, the company has seen its market share improve. Religare expects ITC's fast-moving consumer goods division to break even in the third quarter.

The hotels business continues to put up a lacklustre show, as both average room rates and occupancy are expected to remain static in the quarter. Analysts do not see any revival in the business before another four quarters.

Before the Budget, the ITC stock is expected to remain range-bound, as it always does. Though the company is expected to hike prices in the fourth quarter, there is no major trigger for any upward move in the stock as current valuations are rich. However, Deutsche believes a 37 per cent free cash flow CAGR (FY12-14), a 37 per cent return on equity and 60 per cent dividend payout make the stock compelling. But the implementation of goods and service tax (GST) and tobacco products being kept out of it remains a key risk.

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