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ITC
Growth drivers in place
We believe the growth opportunity in all of ITC’s businesses remains exciting;
ITC has made aggressive investment plans to sustain the 17.2% PAT CAGR it has
seen in the last 10 years. Investment in its paper and hotel businesses should be
largely funded by its own cash flows. Buy, target price Rs229.
Cigarette business outlook intact despite recent tax hikes
Recent VAT increases in three states – Rajasthan (20% to 40%), Gujarat (13.5% to 20%)
and J&K (12.5% to 20%) – have not materially increased ITC’s weighted average VAT
incidence, which we estimate at around 15.5% because these states are not significant
contributors to ITC’s overall cigarette volume. In terms of cigarette sales, ITC’s key states are
Tamil Nadu, Karnataka, Maharashtra and West Bengal – Tamil Nadu and West Bengal will
announce new budgets in a few months after state government elections. The current VAT
duty structure will migrate into a GST (Goods & Services Tax) structure next year, which we
expect to be governed centrally and consist of a uniform tax levy.
ITC preparing for sustained growth in all businesses
Despite the launch of new brands such as Marlboro, ITC’s cigarette business continues to
dominate the domestic market, based on a combination of attractive price points and new
product offerings. The company’s paper manufacturing division plans to increase its 0.5mmt
pa capacity by 0.1mmt within 12-18 months and to add an incremental 0.2mmt pa of
greenfield capacity to its existing facility in Andhra Pradesh. Meanwhile, the hotel division is
working to increase its number of five-star rooms from 3,000 to 4,000 via the launch of the
Grand Chola property in Chennai by end-FY12 and the Kolkata expansion by end-FY13. ITC
is also working to launch new hotels in Hyderabad, Ahmadabad, Gurgaon and Delhi.
We raise our estimates by 1-4% and our TP to Rs229
We raise our three-stage DCF-based target price to Rs229 as we nudge up our earnings
estimates and increase our capex forecast. We see little risk to ITC’s growth due to its strong
competitive position and growth potential in its key business areas of cigarettes, paper and
hotels.
Growth drivers intact
ITC’s diversified growth strategy has delivered an overall PAT CAGR of 17.2% for the past
10 years vs its cigarette business’s EBIT CAGR of 13% in the same period. Thus, its noncigarette
businesses have driven growth, and we see this trend continuing.
ITC’s non-cigarette business – including paper, agribusiness and hotels – have delivered an
overall PAT CAGR of 17.2% over the last 10 years, much higher than its core cigarette business’s
13% EBIT CAGR for the same period. In our view, the company’s most significant achievement in
the last 10 years has been the turnaround of its hotel business. While its division ‘other FMCG
businesses’ is currently losing money due to the initial gestation period for many of the
businesses, we believe the division has the potential to contribute to overall profitability in the next
5-10 years
Hotel and paper businesses funding their own growth
While the paper and hotel businesses used cash generated by the cigarette business to fund their
initial investments, both have generated enough cash flow to fund their own growth for the past
seven years. Going forward, we expect both to fund the majority of their capex via internal cash
generation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ITC
Growth drivers in place
We believe the growth opportunity in all of ITC’s businesses remains exciting;
ITC has made aggressive investment plans to sustain the 17.2% PAT CAGR it has
seen in the last 10 years. Investment in its paper and hotel businesses should be
largely funded by its own cash flows. Buy, target price Rs229.
Cigarette business outlook intact despite recent tax hikes
Recent VAT increases in three states – Rajasthan (20% to 40%), Gujarat (13.5% to 20%)
and J&K (12.5% to 20%) – have not materially increased ITC’s weighted average VAT
incidence, which we estimate at around 15.5% because these states are not significant
contributors to ITC’s overall cigarette volume. In terms of cigarette sales, ITC’s key states are
Tamil Nadu, Karnataka, Maharashtra and West Bengal – Tamil Nadu and West Bengal will
announce new budgets in a few months after state government elections. The current VAT
duty structure will migrate into a GST (Goods & Services Tax) structure next year, which we
expect to be governed centrally and consist of a uniform tax levy.
Despite the launch of new brands such as Marlboro, ITC’s cigarette business continues to
dominate the domestic market, based on a combination of attractive price points and new
product offerings. The company’s paper manufacturing division plans to increase its 0.5mmt
pa capacity by 0.1mmt within 12-18 months and to add an incremental 0.2mmt pa of
greenfield capacity to its existing facility in Andhra Pradesh. Meanwhile, the hotel division is
working to increase its number of five-star rooms from 3,000 to 4,000 via the launch of the
Grand Chola property in Chennai by end-FY12 and the Kolkata expansion by end-FY13. ITC
is also working to launch new hotels in Hyderabad, Ahmadabad, Gurgaon and Delhi.
We raise our estimates by 1-4% and our TP to Rs229
We raise our three-stage DCF-based target price to Rs229 as we nudge up our earnings
estimates and increase our capex forecast. We see little risk to ITC’s growth due to its strong
competitive position and growth potential in its key business areas of cigarettes, paper and
hotels.
Growth drivers intact
ITC’s diversified growth strategy has delivered an overall PAT CAGR of 17.2% for the past
10 years vs its cigarette business’s EBIT CAGR of 13% in the same period. Thus, its noncigarette
businesses have driven growth, and we see this trend continuing.
ITC’s non-cigarette business – including paper, agribusiness and hotels – have delivered an
overall PAT CAGR of 17.2% over the last 10 years, much higher than its core cigarette business’s
13% EBIT CAGR for the same period. In our view, the company’s most significant achievement in
the last 10 years has been the turnaround of its hotel business. While its division ‘other FMCG
businesses’ is currently losing money due to the initial gestation period for many of the
businesses, we believe the division has the potential to contribute to overall profitability in the next
5-10 years
Hotel and paper businesses funding their own growth
While the paper and hotel businesses used cash generated by the cigarette business to fund their
initial investments, both have generated enough cash flow to fund their own growth for the past
seven years. Going forward, we expect both to fund the majority of their capex via internal cash
generation.
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