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FY2011 strong performance amongst peers: ITC performance in FY2011 was strong with a revenue growth of 16.8% year on year (YoY) and a bottom line growth of 22.8% YoY. Despite the inflation in the raw material prices the operating profit margin (OPM) of the company stood at around 35% in FY2011.

            Reduction in working capital days: The company’s cash conversion cycle improved from eight days in FY2010 to negative five days in FY2011, indicating improvement in the company’s working capital management. The inventory days are down from 91 in FY2010 to 83 in FY2011. The reduction in inventory was on the back of smart sourcing of raw materials for its various businesses. On the other hand, the creditor days increased from 98 in FY2010 to 104 in FY2011.

            Strong cash flows: The company has strong cash generating ability. The cash generated from operations was maintained at 25% of its sales in FY2011. Hence, in keeping with the strong growth in the revenues, the cash generated from the operations (stand-alone) grew by 11% YoY in FY2011. After the capital expenditure (capex) the free cash flow of the firm at the stand-alone level grew by 12% YoY. This incremental cash generated from the operations led to an increase in the cash on books to Rs2,243.2 crore in FY2011 (from Rs1,126.3 crore in FY2010). 

Sustenance of strong dividend pay-out: This is the second consecutive year of a strong dividend pay-out by the company. Its dividend pay-out ratio stood at 82.6% (which was way ahead of the average 50% dividend pay-out between FY2006 and FY2009). With the profits expected to improve significantly in future the company is likely to continue the strong dividend pay-out in the coming years.

            Improvement in return ratios: The return ratios showed a strong improvement in FY2011 with the return on net worth (RoNW) and return on capital employed (RoCE) up from 29.2% and 38.3% in FY2010 to 33.2% and 42.7% respectively in FY2011. 

            YC Deveshwar to extend his term with the company: YC Deveshwar (chairman of ITC) will extend his stint as a chairman with ITC. However, he may serve part of his extended term as a non-executive chairman, handing over the company’s diverse businesses to a successor. Mr Deveshwar’s extension of tenure for another five years would play a key role in sustaining ITC’s strong growth momentum.

            Valuation and view: We have incorporated the balance sheet numbers for FY2011 and there are no major changes in our earnings estimates for FY2012 and FY2013. At the current market price the stock trades at 24.4x its FY2012E earnings per share (EPS) of Rs7.9 and 20.6x its FY2013E EPS of Rs9.3. We maintain our Buy recommendation on the stock with a price target of Rs223.