ITC’s revenue and profit growth for third-quarter 2015 slowed considerably to 2% and 10%, respectively. However, putting things into perspective, during the first nine months revenue grew 13% and earnings 11%, trending closer to our 14% and 13% full-year estimates, respectively. Although there was considerable sell off in the stock (5% decline in price in a single day) as it missed the streets’ quarterly estimates, we believe the underlying fundamentals driving this narrow moat-rated stock are still firmly intact. The full-year numbers should inch closer to our estimates, as the March quarter has historically been one of the stronger quarters. We are keeping our INR 406 per share fair value estimate unchanged, and believe the stock is undervalued.
Three of ITC’s more profitable segments showed considerable weakness during the quarter—cigarettes grew 1%, paper -5% and agriculture -11%. We attribute slower cigarettes growth to lower volumes as excise taxes were passed on to consumers in the form of higher prices dampening demand moderately. Furthermore, to more effectively compete with illicit substitutes the firm’s introduction of the cheaper 64mm variant will perhaps result in a change in product mix and price realization in the future. From a return on capital employed, or ROCE, perspective, cigarettes continue to be hugely profitable generating 49% returns this quarter, albeit a decline from 51% earned last year.
On the other hand, its segments with lower profitability—namely, hotels grew 11% and consumer products 5%. In fact, the consumer segment reported a profit of INR 0.11 billion after reporting losses for two quarters. We continue to hope that the year for consumer would end on a positive note, so we could finally say the business is generating profits after 10 years of investment by the company.
Overall, our outlook for ITC continues to remain favourable despite this one quarter of poor performance.
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