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ITC
Clearing the smoke
Event
ITC’s stock price has corrected ~11% in the last eight sessions despite
reporting better than expected earnings for the Dec quarter. We understand
the recent stock correction is due to the market’s anxiety over tax hikes on
cigarettes in the Union budget (on 28 Feb). We believe ITC will be able to
pass on the hike to consumers and grow profits strongly. We view the current
stock weakness as a buying opportunity. Our TP provides 25% potential upside.
Impact
History likely to repeat itself. In six of the last ten years, ITC has
underperformed the benchmark SENSEX before the budget. More
importantly, post budget, ITC outperformed the index in eight out of the last
ten years. Also, the average outperformance has been much stronger at 10%
compared to average underperformance of 2%. In absolute terms, ITC’s stock
price return post budget has been 11% vs a 1% decline pre-budget.
Current stock price factoring in sharp duty hike. We believe ITC’s stock
performance in the pre-budget period reflects market expectations of an excise
duty hike in the budget. In the last ten budgets, there have been large tax hikes
four times. ITC has fallen 7–15% in the two month period before budgets in
each of these four years (2001, 2007, 2008, 2010). Similarly, ITC saw positive
returns pre-budget in the years of low tax hikes (2002, 2004, 2006, 2009).
Cigarette profits have grown strongly despite tax hikes. We believe the
stock price is factoring in a large (>10%) tax hike in the coming budget. Given
its dominant market share and nature of the product, ITC in the past has been
able to increase cigarette prices and pass on the tax burden to consumers.
Subsequently, ITC has grown its cigarette EBIT at a 16% CAGR over the last
seven years, with the lowest growth (13%) in the year of no tax increase (2004).
Defensive play against key risks faced by the markets. We believe ITC’s
operations face minimal exposure to the key risks facing Indian markets today
– rising interest rates, high inflation and a surge in crude prices. Further, an
increase in tobacco prices has a small impact on ITC’s margins. Direct
sourcing helps ITC to keep tobacco costs down and its strong market share
provides pricing power.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs200.00 based on a Sum of Parts methodology.
Catalyst: Union budget announcement on 28th Feb.
Action and recommendation
Top pick in the sector. We believe ITC’s growing FMCG portfolio, dominant
presence in the luxury hotels segment and strong product proposition in
specialty paper make it a strong play on India’s consumption. ITC is trading at
20.3x FY12E PER with EPS growth of 20% and dividend yield of 3.5%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ITC
Clearing the smoke
Event
ITC’s stock price has corrected ~11% in the last eight sessions despite
reporting better than expected earnings for the Dec quarter. We understand
the recent stock correction is due to the market’s anxiety over tax hikes on
cigarettes in the Union budget (on 28 Feb). We believe ITC will be able to
pass on the hike to consumers and grow profits strongly. We view the current
stock weakness as a buying opportunity. Our TP provides 25% potential upside.
Impact
History likely to repeat itself. In six of the last ten years, ITC has
underperformed the benchmark SENSEX before the budget. More
importantly, post budget, ITC outperformed the index in eight out of the last
ten years. Also, the average outperformance has been much stronger at 10%
compared to average underperformance of 2%. In absolute terms, ITC’s stock
price return post budget has been 11% vs a 1% decline pre-budget.
Current stock price factoring in sharp duty hike. We believe ITC’s stock
performance in the pre-budget period reflects market expectations of an excise
duty hike in the budget. In the last ten budgets, there have been large tax hikes
four times. ITC has fallen 7–15% in the two month period before budgets in
each of these four years (2001, 2007, 2008, 2010). Similarly, ITC saw positive
returns pre-budget in the years of low tax hikes (2002, 2004, 2006, 2009).
Cigarette profits have grown strongly despite tax hikes. We believe the
stock price is factoring in a large (>10%) tax hike in the coming budget. Given
its dominant market share and nature of the product, ITC in the past has been
able to increase cigarette prices and pass on the tax burden to consumers.
Subsequently, ITC has grown its cigarette EBIT at a 16% CAGR over the last
seven years, with the lowest growth (13%) in the year of no tax increase (2004).
Defensive play against key risks faced by the markets. We believe ITC’s
operations face minimal exposure to the key risks facing Indian markets today
– rising interest rates, high inflation and a surge in crude prices. Further, an
increase in tobacco prices has a small impact on ITC’s margins. Direct
sourcing helps ITC to keep tobacco costs down and its strong market share
provides pricing power.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs200.00 based on a Sum of Parts methodology.
Catalyst: Union budget announcement on 28th Feb.
Action and recommendation
Top pick in the sector. We believe ITC’s growing FMCG portfolio, dominant
presence in the luxury hotels segment and strong product proposition in
specialty paper make it a strong play on India’s consumption. ITC is trading at
20.3x FY12E PER with EPS growth of 20% and dividend yield of 3.5%.
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