ITC Ltd. reported its Q1 FY10 results is in line with our expectations: Net Sales for Q1 FY10 went up by 4.7% to Rs. 4082.68 crores as compared to Rs. 3899.7 crores in Q1 FY09 and was up by 4.9% from Rs. 3891.81 crores in Q4 FY09.

FMCG and Paper & Packaging businesses grew handsomely on the net revenues front up by 19% and 16% respectively, overall turnover growth for the Quarter was muted at 4.7% due to the de-growth in Hotels and Agribusinesses as compared to the Q1 FY09.

EBITDA increased by 18.8% to Rs. 1474.9 crores in Q1 FY10 compared to Rs. 1241.47 crores in Q1 FY09 and increased by 9.2% from Rs. 1350.56 crores in Q4 FY09. ?? Net Profit for Q1 FY10 went up by 17.4% to Rs. 878.7 crores as compared to Rs. 748.67 crores in Q1FY09 and increased by 8.6% from Rs. 808.99 crores in Q4 FY09.

The Company reported an EBITDA margin of 36.1% in Q1 FY10, up by 430 basis points as compared to 31.8% in the Q1 FY09 and up by 140 bps as compared to 34.7% in Q4 FY09. The other income was up by 9.4% to Rs. 87.57 crores in Q1 FY10 from Rs. 80.05 crores in Q1 FY09 and by 56.7% from Rs. 52.25 crores. ?? The total expenditure was almost flat to Rs. 2745.59 crores in Q1 FY10 as compared to Rs. 2772.58 crores in Q1 FY09 and was up by 4.4% from Rs. 2629.1 crores in Q4 FY09.

ITC reported a PAT margin of 21.5% in Q1 FY10, as compared to 19.2% in Q1 FY09 and 20.8% in Q4 FY09. ?? The Company has reported an EPS of Rs. 2.33 in Q1 FY10 as against Rs. 2.15 in Q4 FY09.

The revenue from the Cigarette segment grows by 23.3% to Rs. 2145.6 crores in Q1 FY10 from Rs. 1739.67 crores in Q1 FY09 and by 6.7% from Rs. 2011.54 crores in Q4 FY09.

Pictorial graphic warnings on cigarette packs implemented w. e. f 31st May 2009 & Maharashtra, Delhi and Rajasthan increasing the VAT rate from 12.5% to 20% did not have any major negative impact on its cigarettes earnings which accounts for around 50% of the total revenue. The company was able to off-set the rise in excise duty by some states by increasing the price of its certain brands.

The government in the Union budget 2010 did not increase the excise duty in cigarettes which also boosted the cigarette revenues in Q1 FY10.

The revenues in the Hotel business fell by 27.7% to Rs. 172.81 crores in Q1 FY10 from Rs. 238.97 crores in Q1 FY09 and by 21.8% from Rs.
221.03 crores in Q4 FY09. The squeeze on corporate travel along with the steep reduction in international travel as a fallout of the global financial crisis has triggered a significant slide in occupancies and average room rates.

The consumers have lost confidence in the leisure travel, post- Mumbai terror strikes, and the swine flu case, has negatively impacted the hotel business.

The business maintained its market leadership in the Paperboard and Packaging business with net segment revenues increasing by 16% to Rs. 702.62 crores in Q1 FY10 from Rs. 605.92 crores in Q1 FY09. This was driven by the growth of the premium value added paperboard segment, successful penetration of the paper markets and robust performance of the packaging business.

The revenues in the Other FMCG business was up by 9.5% to Rs. 757.25 crores in Q1 FY10. The company is able to expand its presence in the market with the help of aggressive communication strategy and increasing its reach to the consumers which has further leveraged its brand position and brand awareness among the consumers.

The revenue in the Agri-business was decreased by 48.7% to Rs. 940.61 crores in Q1 FY10 from Rs. 1834.49 crores in Q1 FY09. Lack of market opportunities resulted in lower throughput of soya and wheat volumes, impacting agri product revenues during the period. The leaftobacco was the major contributor in the revenue.

VALUATION & RECOMMENDATION: At the CMP of Rs. 230 per share, the stock is currently trading at a PE of 20.2x FY10E & 17.8x FY11E, which looks a bit undervalued when compared to the peers in the industry. The FMCG segment as a whole trades at an Average PE of around 24x earnings. ITC historically has traded in the PE range of
21x to 27x with an average PE of around 24x. At Rs. 230 per share the stock is trading at a discount of 9% from our intrinsic price of Rs. 250 per share (PE of 22xFY10E) which is 22x FY10E and 19.4x FY11E earnings. We recommend to hold the stock at current price.

Company Profile: ITC is the largest private sector cigarette company with a diversified portfolio comprising hotels, paperboards & specialty papers, packaging, agri-business, packaged foods and confectionery, branded apparel, greeting cards and other FMCG products. ITC is the market leader in its businesses of cigarettes, hotels, paperboards, packaging and agri-exports, it is rapidly gaining market share even in its nascent businesses of Packaged Foods & Confectionary, Branded Apparel, Personal Care and Stationary.