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ITC (ITC)
Consumer products
Potential for increase in payout ratio exists. ITC is entering a phase of high FCF
generation – we forecast Rs156 bn (Rs20/share) over FY2010-13E. A confluence of all
businesses performing well and no increase in capex plans is driving this—we expect
potential increase in payout ratio from the current 50%. We highlight that in the earlier
period of 2003-05, one of the reasons for the rerating of the ITC stock (from ~12P/E to
~17P/E) was the step-up in dividend payout to ~50% from ~30%. The recent ban on
gutkha (chewing tobacco) in plastic packaging, if implemented well, could benefit other
forms of tobacco (including cigarettes). ADD.
Ban on gutkha (chewing tobacco) in plastic packaging, if implemented well, could benefit other
forms of tobacco (including cigarettes)
The Supreme Court in December 2010 had set the deadline of March 1, 2011 for manufacturers
to withdraw plastic packaging for tobacco products (predominantly sachets). The Central
government in February 2011 banned the use of plastic materials in sachets for gutkha, tobacco
and pan masala (under the Plastic Waste (Management and Handling) Rules 2011). However,
during our channel checks (12 outlets) in Mumbai and Delhi, we found that gutkha is still available
in a few outlets. The vendors claim that these are existing stocks which are getting liquidated. We
find this argument intriguing as typically the tobacco trade channel is one of the efficient retail
channels with daily servicing of the retailer (by the distributor). We highlight that, the ban, if
implemented well, could potentially benefit the consumption of other forms of tobacco, in our
view.
Buy ITC for potential increase in dividend payout ratio
` Potential for increase in dividend payout ratio. We assign a high probability for an increase
in the dividend payout in FY2010-13E as ITC is likely to generate FCF of Rs156 bn and the
company is likely to have cash position of Rs86 bn (Rs11/share) by end-FY2013E.
We note that in the earlier period of 2003-05, one of the major reasons for rerating of the ITC
stock (from ~12P/E to ~17P/E) was the step-up in dividend payout to ~50% from ~30%.
` Improving ROCE as all businesses will likely contribute incrementally to profits and capex as a
percentage of sales is declining.
Reiterate ADD and TP of Rs185
Our long-standing positive view on the stock remains as ITC is entering a phase of high FCF
generation and excise duty in Central budget was left unchanged. However, ITC needs to
watch for potential increases in state VAT in FY2012E. Two recent examples, (1) in the
budget for FY2012, Gujarat increased the VAT on cigarettes to 25% (from 20%), and (2)
Himachal Pradesh increased it to 16% (from 13.75%) for cigarettes. It is interesting to note
that VAT on bidis was increased to 16% from 5%.
We model 4% volume growth in cigarettes (which has upside risks now) and forecast an EPS
of Rs7.8 for FY2012E (+19% growth). Retain ADD, TP of 185. Key risks are (1) unexpected
higher losses in other FMCG, (2) any aggressive marketing strategy (including trade
discounting) by Philip Morris to promote Marlboro.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ITC (ITC)
Consumer products
Potential for increase in payout ratio exists. ITC is entering a phase of high FCF
generation – we forecast Rs156 bn (Rs20/share) over FY2010-13E. A confluence of all
businesses performing well and no increase in capex plans is driving this—we expect
potential increase in payout ratio from the current 50%. We highlight that in the earlier
period of 2003-05, one of the reasons for the rerating of the ITC stock (from ~12P/E to
~17P/E) was the step-up in dividend payout to ~50% from ~30%. The recent ban on
gutkha (chewing tobacco) in plastic packaging, if implemented well, could benefit other
forms of tobacco (including cigarettes). ADD.
Ban on gutkha (chewing tobacco) in plastic packaging, if implemented well, could benefit other
forms of tobacco (including cigarettes)
The Supreme Court in December 2010 had set the deadline of March 1, 2011 for manufacturers
to withdraw plastic packaging for tobacco products (predominantly sachets). The Central
government in February 2011 banned the use of plastic materials in sachets for gutkha, tobacco
and pan masala (under the Plastic Waste (Management and Handling) Rules 2011). However,
during our channel checks (12 outlets) in Mumbai and Delhi, we found that gutkha is still available
in a few outlets. The vendors claim that these are existing stocks which are getting liquidated. We
find this argument intriguing as typically the tobacco trade channel is one of the efficient retail
channels with daily servicing of the retailer (by the distributor). We highlight that, the ban, if
implemented well, could potentially benefit the consumption of other forms of tobacco, in our
view.
Buy ITC for potential increase in dividend payout ratio
` Potential for increase in dividend payout ratio. We assign a high probability for an increase
in the dividend payout in FY2010-13E as ITC is likely to generate FCF of Rs156 bn and the
company is likely to have cash position of Rs86 bn (Rs11/share) by end-FY2013E.
We note that in the earlier period of 2003-05, one of the major reasons for rerating of the ITC
stock (from ~12P/E to ~17P/E) was the step-up in dividend payout to ~50% from ~30%.
` Improving ROCE as all businesses will likely contribute incrementally to profits and capex as a
percentage of sales is declining.
Our long-standing positive view on the stock remains as ITC is entering a phase of high FCF
generation and excise duty in Central budget was left unchanged. However, ITC needs to
watch for potential increases in state VAT in FY2012E. Two recent examples, (1) in the
budget for FY2012, Gujarat increased the VAT on cigarettes to 25% (from 20%), and (2)
Himachal Pradesh increased it to 16% (from 13.75%) for cigarettes. It is interesting to note
that VAT on bidis was increased to 16% from 5%.
We model 4% volume growth in cigarettes (which has upside risks now) and forecast an EPS
of Rs7.8 for FY2012E (+19% growth). Retain ADD, TP of 185. Key risks are (1) unexpected
higher losses in other FMCG, (2) any aggressive marketing strategy (including trade
discounting) by Philip Morris to promote Marlboro.
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