| | | STOCK UPDATE ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs227
Current market price: Rs192 Price hike in cigarettes Key points -
WNC prices increased by 10%: ITC has increased the prices of the Wills Navy Cut (WNC) brand of cigarettes by 10%. The price of a pack of ten cigarettes has been increased to Rs44 from Rs40 earlier. WNC contributes around 5% of ITC's total cigarettes sales volumes.
This is the second price hike the company has effected in its cigarette portfolio after the announcement of the Union Budget for FY2012. ITC recently hiked the prices of the Classic brand (5% of cigarette sales volume) of cigarettes by 10% to Rs110 for a pack of 20 cigarettes. Year-to-date price increase in the cigarette portfolio currently stands at 5.1%. -
Price hikes to lessen the impact of VAT increase in key states: The recent price hikes in the cigarette portfolio have been undertaken largely to mitigate the impact of the recent hike in the value-added tax (VAT) in the key states of Tamil Nadu, West Bengal and Andhra Pradesh (which together contribute close to 32% to the cigarette revenues). -
Outlook and valuations: Since our last update (dated on September 02, 2011) the stock has corrected by ~5%. This provides an opportunity for the investors to invest in the stock with the expectation of a decent upside of 19% from the current levels. Hence, in view of the decent upside and the better earnings visibility over the next two years, we maintain our Buy recommendation on the stock with the price target of Rs227. At the current market price the stock trades at 24.5x its FY2012E earnings per share (EPS) of Rs7.8 and 20.5x its FY2013E EPS of Rs9.4. Grasim Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,630
Current market price: Rs2,350 Annual report review Key points -
FY2011 performance marred by cement division: The VSF & chemical division propelled FY2011's revenue growth. However on account of a muted cement volume and a drop in the average cement realisation, the overall revenue growth of the company was limited to 6.7%. A higher cost inflation led to margin contraction by over 700 basis points (bps), eroding the net profit by 21.6% year on year (YoY) to Rs2,163.9 crore. -
Segmental performance: The cement division is the major contributor to Grasim's revenues. It formed 75% of the total revenues in FY2011 whereas the VSF and chemical divisions contributed 23% and 3% respectively. As demand revived for VSF and prices surged for competing fibers like cotton, the revenue from the VSF division grew by 22.6%. The chemical division also posted a double digit revenue growth. However, the performance of the cement division was affected due to a decline in the average cement realisation. Hence the consolidated revenue could grow by just 3.2%. In terms of profitability, the VSF division has maintained its healthy margin (profit before interest, depreciation and tax [PBIDT]%) at 33.7%. However, the profit before interest and tax [PBIT]% of the cement as well as the chemical division contracted due to cost inflation and pressure on cement realisation during FY2011. -
Key developments during the year: The demerger of the company's cement business into a separate subsidiary, Samruddhi Cement Ltd (SCL), and the subsequent merger of SCL with UltraTech Cement (UltraTech) were completed during the year. UltraTech completed the acquisition of ETA Star Cement Company with its assets comprising of 2.3 million TPA clinker facility and grinding units spread across UAE, Bahrain and Bangladesh. Consequent to this acquisition, the cement capacity stands augmented at 52MTPA. Further, on the VSF front, the company has acquired a 33% stake in Aditya Holding AB, Sweden, which acquired Domsjo Fabriker AB (Domsjo), Sweden, at an enterprise value of approximately Rs1,570 crore. Domsjo is a pulp mill company and hence Grasim has secured its captive pulp requirement for VSF production. -
Maintain Buy with a target price of Rs2,630: We continue to prefer Grasim as our top pick among the other large players due to its strong balance sheet, comfortable debt - equity ratio (0.4x FY2011), attractive valuation and diversified business. We estimate the consolidated earnings of the company to grow at a compounded annual growth rate (CAGR) of over 17% during FY2011-2013. We use the sum of the parts (SOTP) valuation methodology to arrive at a target price to Rs2,630 for the stock. At the current market price the stock discounts its FY2013 estimated earning per share (EPS) by 7.3x. We maintain our Buy recommendation on the stock. -
Outlook and valuation: We continue to prefer Grasim as our top pick among the large players due to its strong balance sheet, comfortable debt-equity ratio (0.4x FY2011), attractive valuation and diversified business of the company. We estimate consolidated earnings of the company to grow at a CAGR of over 17% during FY2011-2013. We arrive at a target price to Rs2,630 using the SOTP valuation methodology. At the current market price the stock discounts FY2013 estimated EPS by 7.3x. We maintain our Buy recommendation on the stock. | | |
