ITC recorded 18.4% y-o-y growth in revenues at Rs39 billion almost inline with our expectation of Rs39.2 billion during Q1FY09. The growth was primarily driven by 5.7% growth in core cigarettes (~3% decline in volumes) and strong 32.3% increase in agri segment. The non-cigarette businesses recorded 28.5% growth at Rs34.4 billion.
The company has commenced commercial production at its new ‘Ozone bleached’ pulp mill (with a capacity of 1.22 lakh tons) and initial trials of its 1 lakh ton paper plant during the quarter.
Going forward, we believe the cigarette volume decline would significantly reduce in the coming quarters partly aided by the consumer shift from non-filter to filter cigarettes. Outlook for the non-cigarette businesses such as hotels and paper remains positive with continued demand buoyancy.
The losses in the FMCG - others segment have increased sharply due to the heavy spend on the launch of personal care products. Within a short span of time, the company has managed to achieve good market share in its newly launched brands.
We expect this segment to turn profitable by FY10. With the entry into the personal care category, we expect ITC to become a tough competitor to HUL and GCPL, given its strong distribution network in the rural (~6,400+ e-choupals and 23 Choupal Saagars) and urban markets.
Also, strong cash flows from cigarette business can be invested in advertising heavily to build the personal care portfolio. At the current market price of Rs188, the stock is trading at 17.6x FY10E EPS of Rs10.7 per share. We recommend BUY with a one-year price target of Rs214, an upside of 13.5%.