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ITC (ITC.BO)
Buy: Calibrating Earnings, Post Mgmt Conference Call Takeaways
Healthy volume growth in cigarette business — We tweak our cigarette volume
estimates from ~4% over both FY12/13E to 5%/3% respectively. Additionally, we
increase cigarette realization estimates by 5% CAGR over FY12-13E (3% earlier)
reflecting the recent 5% price hike in Feb. We expect continued buoyancy in volumes
and the pricing environment. We note that upside risks persist to volumes – ITC has
maintained volumes despite adverse tax changes in 3 of the past 4 years. Leeway on
coinage could result in further price hikes without impacting consumer prices.
Other FMCG losses forecast to continue to decline, as planned — We think lower
FMCG losses are commendable, given other peers in the FMCG space are stating
margins will be under pressure due to competitive intensity/input cost pressures. Mgmt
reiterated that the entire category should break even in FY13E.
Capex unchanged, we forecast increase in dividend payout — Capex forecasts
remain unchanged at Rs50bn over the next 3 years. When queried, mgmt stated that
there has been no change in the dividend policy, except for the fact that the dividend
payout ratio has gradually increased. Given unchanged capex estimates and the
attendant increase in cash levels, we’ve increased our payout ratio to 50% from 43%.
VAT narrows gap with GST — The implementation of GST by April 2012 remains a
question mark. However, assuming it is levied at 20%, it would imply an additional duty
of only around 4%. ITC’s weighted average VAT rate is ~14.5%, followed by an
additional ~1.5% for CST, octroi and state entry taxes. We believe this 4% price hike
can be passed through easily.
Maintain Buy — ITC is our top pick in the consumer staples sector. We increase our
TP to Rs207 (from Rs190) as we roll forward to 25x Sept 12E P/E (25x March12 P/E
earlier). We increase our EPS forecasts by 2-3% to reflect better volume/pricing trends
in cigarettes. Key risks: Rise in personal care losses, lower than forecast cigarette volumes.
Maintain Buy on ITC – Increase Target Price to Rs207
We remain positive on ITC after our conference call with management. We are
enthused about the prospects for cigarette volume growth. We factor in 5% volume
growth for FY12 – and note that risks are skewed to the upside – especially given
that excise rates are unchanged this fiscal. The weighted average price hike on the
cigarette portfolio thus far is about 5% - we think this might be a somewhat quiet
year in terms of price hikes, given the aggressive hikes last fiscal (15% initially,
followed by another 5% in 4QFY11). Consequently, we have not factored in any
further price hike into our forecasts.
Other businesses continue to stay the course – non cigarette FMCG losses
continue to trend down in line with expectations, bolstered by lower losses in
retailing and biscuits. We think this is commendable, given the backdrop of soaring
commodity costs.
We have increased our EPS estimates very slightly – ~2-3% over FY12-13E,
essentially re-balancing volume/price assumptions. Our new target price of Rs207 is
based on 25x Sept12E earnings (we roll forward from Mar12E). Our multiple
remains unchanged at this juncture. We note that on both an absolute and a relative
P/E perspective, ITC appears more expensive vis-à-vis its past trading history, but
we believe the re-rating will sustain, given a) continued strength in ITC’s earnings
growth, b) it remains relatively cheap (on a P/E basis) compared with some of the
other better-positioned FMCG names like Nestle, and c) The FMCG pack could
continue to de-rate, given competitive intensity and commodity cost inflation; these
factors could potentially impact ITC across businesses, but to a lesser degree.
Key Takeaways from Management Call
1 – Cigarettes: We are Optimistic on Volume Growth Prospects
Management declined to provide formal guidance on cigarette volume trends, but
indicated that as recently as FY10, cigarette volumes rose c7%, given an
environment of no excise duty hikes. We raise our cigarette volume forecasts to 5%
(4% earlier) and note that upside risks persist.
As regards pricing, the price hikes undertaken in Feb 2011– almost 9% on Gold
Flake Filter, 12% on both Capstan and Bristol and around 20% on Berkeley – imply
an overall price hike of 5%. Leeway to raise prices and margins on account of
coinage benefits exists in Gold Flake RSFT – wherein the brand is priced at Rs38
for a pack of 10 sticks – an increase to Rs40 (customer already pays Rs4/stick)
implies a 5% increase in prices; we estimate this would increase overall pricing by
1% (we estimate Gold Flake is around 20% of revenues).
From a competitive perspective, management noted that competitive intensity is
high – but manageable. Over the last year, initiatives to improve the pack and
smoke profile, and introduction of new brands/variants like ‘Lucky Strike’, ‘Classic
Menthol Rush’, ‘Gold Flake Kings Arctic Menthol’, ‘Gold Flake SLK’ and
‘Player’s Gold Leaf’ strengthened ITC’s market positioning.
2 – GST Implementation: More questions than answers
The implementation of GST by Apr 2012 remains a question mark. However,
assuming it is levied at 20%, it would imply an additional duty of around 4%. ITC’s
weighted average VAT rate is 14.5%, followed by an additional 1.5% for CST, octroi
and state entry taxes.
3 – Personal Care: Revenue growth remains on track
ITC's personal care portfolio revenues are an annualized ~Rs4.8bn (based on FY11
monthly exit rate of Rs400m / month). This compares favorably with ~Rs2-2.5bn in
FY09. For the soaps business, current market share is ~5-6% (volume share).
Mgmt noted that in certain states like West Bengal and Orissa, soaps market share
is in the teens. For shampoos, the market share is around 2-3%. Management also
admitted that the shampoo category is tougher to penetrate and build brands, given
the higher level of customer engagement required. On a separate note, mgmt noted
there have been no signs yet of any consumer down-trading – in either soaps or
shampoos.
The evolution of the personal care portfolio has to be monitored carefully; early
market share gains can easily reverse as a) customer retention is difficult, and b)
soaps are a quasi commodity, especially at the lower end.
The personal care portfolio is expected to break even around 3-4 years from today.
Per our understanding, gross margins are in line with industry players, but lack of
scale results in losses at the EBIT level. We estimate that ad spends in the personal
care space are ~Rs3-4bn annually. With total revenues of Rs5bn and a gross
margin of ~45%, total revenues have to increase at least 1.5x before ad expenses
can be comfortably offset by gross margins.
In terms of the skin care segment, management noted that the fairness cream (Vivel
Active Fair) has now been rolled out across 11-12 states.
4 – 'Other FMCG' losses – being gradually reined in
Mgmt noted EBIT losses in this category as a whole should continue to reduce – in
line with the trends evidenced in 3QFY11. Management noted that the entire other
FMCG portfolio is on track to break even by end FY13 – despite escalating
commodity costs and packaging expenses. This was slightly contrary to our
expectations, wherein we expected that the losses might continue for some time,
given the competitive environment across FMCG categories and the cost pressures
that other players are facing in those segments. The positive variance in this
portfolio continues to be driven by a) lower losses in retailing, and b) biscuits
portfolio’s break even – despite higher input costs. The losses should be contained
to ~Rs3bn in FY11 – in line with 9MFY11 trends.
Retailing business has been restructured – Retail is a shade less than 10% of
revenues of the non cigarette FMCG portfolio. Mgmt undertook a fair bit of store
restructuring in the downturn – at that juncture, Wills stores had been reduced to
48 from 54, John Players stores had seen a more drastic decline – to 230 from
around 270. Both have now seen an uptick in footprint – Wills stores have
expanded to 70 (~50% increase), John Players to 300 (30% increase). Samestore sales growth in retailing has increased to low teens in value terms. Mgmt
noted that there have been no recent price hikes in apparel – and appeared fairly
sanguine about cotton price inflation – contrary to other retailers that have
indicated that margins could be pressured due to escalating cotton cost prices.
Food business – only Bingo! remains unprofitable, for now - Biscuits
comprise 30% of revenues of the foods portfolio. The mix shift strategy that mgmt
undertook from late FY09 (increasing proportion of creams + cookies) has paid
off – and the category has been profitable from late FY10. At present, ITC’s
brands have a low teen’s market share in the biscuits segment. Mgmt noted that
Bingo! remains unprofitable at this juncture – it has around ~10-13% market
share – we believe this category should be profitable in 2-3 years as revenue
growth results in operating leverage benefits.
5 – Agri Business: Benefits from Continued Mix Change
Management's conscious decision to focus on higher profitability products and
move away from lower-margin products like sesame, rice, pulses, etc., in FY09
resulted in EBIT margins increasing to 11% in FY09 (vs. 5.2% in FY08). Leaf
tobacco is at present 50% of category sales – with soya, coffee and wheat
accounting for the rest. Mgmt noted that the margin trend remains favorable –
margins have ranged from 9-16%, averaging 13% over the past 3Qs. Management
expects margins to sustain, though volumes/revenue growth might decline on
account of lower leaf tobacco output due to unseasonal rains in Andhra Pradesh.
6 – Hotels: Gradual rollout of properties continues
Current hotel inventory is 3,100 hotels in the luxury segment, 2,400 under the
Fortune brand (managed properties) and around 1,000 rooms in the heritage
segment (through JVs). ITC’s 600-room Chennai property will be operational mid
FY12, the 500-room Kolkata property is under construction (operational in 2+
years), while two 100-room properties will be added in Bangalore / Delhi.
The ARR was ~Rs9,000 in 3Q – those trends continue. Occupancies have been
growing in the low single digits while ARRs have been growing in the high single
digits. Current occupancy levels are in the high 60s – management noted that
occupancies typically peak out in the mid 70s.
7 – Paperboard and paper: Forecast 10-15% revenue growth
The paper business’ revenues are forecast to increase 10-15%, driven by a
combination of volumes (>10%), with mix and price driving the rest of the growth.
Paper prices will be increased as higher input costs (pulp) are passed through.
Incremental 100,000 TPA of paperboard capacity will be added in FY12.
ITC
Company description
ITC is the leading cigarette manufacturer and marketer in India with about 74%
market share by volumes. The group is ~32% owned by BAT (British American
Tobacco). The company's cigarette portfolio carries strong brands such as Wills,
Gold Flake, India Kings and Scissors, and two of BAT's global brands, Benson &
Hedges and State Express 555. Besides tobacco, ITC operates in other business
divisions, namely a) other FMCG businesses (foods/snacks, personal care,
education & stationary and retailing), b) hotels, c) paper & packaging d) agricultural
commodities business, and, e) IT. However, about 66% of its revenues and 83% of
its profits are from the cigarette business (in FY10). The group has made significant
investments in the hotels, paperboard and processed foods (biscuits, ready-to-eat
foods, confectioneries) businesses.
Investment strategy
We rate the stock as Buy / Low Risk (1L) with a target price of Rs207. The cigarette
business remains the key driver of earnings, given the backdrop of a robust pricing
environment, coupled with modest volume increases and better mix. Thus far, ITC
has been successful in passing through excise duty increases, resulting in strong
margins. Positive cigarette volume growth despite aggressive pricing actions should
enable the stock's recent re-rating to sustain. Over the next few years, ITC's overall
revenue streams should become far more balanced as the non-tobacco FMCG
business attains critical mass (currently c.15% of revenues). We forecast a strong
17% EPS growth CAGR over FY10-12E.
Valuation
Our target price of Rs207 is based on 25x Sept12E earnings. ITC's stock has
experienced a gradual re-rating, as concerns pertaining to cigarette volume decline
(post the excise/VAT imposition) have been largely unfounded, with overall cigarette
volumes growing c.4% over FY09-11E, thus underscoring the resilience and
defensive attributes of the core cigarette business. Moreover, while PAT and
earnings have been somewhat volatile over the past few years, this has been on
account of the different growth trajectories and life cycles of ITC's other businesses,
some of which (i.e. personal care and foods) are at nascent stages of operations
and have yet to attain sustainable cash generation. In FY11 too, the company took
aggressive price increases that offset the excise increases, and augmented the
operating margins. Our target P/E multiple of 25x is above the last three-year
historical trading average (~21x). We note that from an absolute P/E perspective,
ITC is ~15% below peak valuations (around 27-28x). From a relative P/E
perspective, however, ITC appears relatively cheap - trading at around 1.5x - vs. a
peak of around 1.75x.
ITC has a relatively stable earnings stream, so P/E is our primary valuation
methodology.
Risks
We rate ITC shares as Low Risk because the company operates in branded
businesses and its earnings volatility is low. Downside risks that could prevent the
stock from reaching our target price include: 1) With most of its earnings coming
from the tobacco segment, ITC is most at risk from controls and the government's
tax policy. 2) Perceived as being a "sin" industry, the stock is prone to negative
share price reactions. 3) Other significant risks for the company are dilution in
capital efficiency from investments in non-tobacco businesses and the possible
acquisitions of capital intensive businesses that fail to enhance value.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ITC (ITC.BO)
Buy: Calibrating Earnings, Post Mgmt Conference Call Takeaways
Healthy volume growth in cigarette business — We tweak our cigarette volume
estimates from ~4% over both FY12/13E to 5%/3% respectively. Additionally, we
increase cigarette realization estimates by 5% CAGR over FY12-13E (3% earlier)
reflecting the recent 5% price hike in Feb. We expect continued buoyancy in volumes
and the pricing environment. We note that upside risks persist to volumes – ITC has
maintained volumes despite adverse tax changes in 3 of the past 4 years. Leeway on
coinage could result in further price hikes without impacting consumer prices.
Other FMCG losses forecast to continue to decline, as planned — We think lower
FMCG losses are commendable, given other peers in the FMCG space are stating
margins will be under pressure due to competitive intensity/input cost pressures. Mgmt
reiterated that the entire category should break even in FY13E.
Capex unchanged, we forecast increase in dividend payout — Capex forecasts
remain unchanged at Rs50bn over the next 3 years. When queried, mgmt stated that
there has been no change in the dividend policy, except for the fact that the dividend
payout ratio has gradually increased. Given unchanged capex estimates and the
attendant increase in cash levels, we’ve increased our payout ratio to 50% from 43%.
VAT narrows gap with GST — The implementation of GST by April 2012 remains a
question mark. However, assuming it is levied at 20%, it would imply an additional duty
of only around 4%. ITC’s weighted average VAT rate is ~14.5%, followed by an
additional ~1.5% for CST, octroi and state entry taxes. We believe this 4% price hikecan be passed through easily.
Maintain Buy — ITC is our top pick in the consumer staples sector. We increase our
TP to Rs207 (from Rs190) as we roll forward to 25x Sept 12E P/E (25x March12 P/E
earlier). We increase our EPS forecasts by 2-3% to reflect better volume/pricing trends
in cigarettes. Key risks: Rise in personal care losses, lower than forecast cigarette volumes.
Maintain Buy on ITC – Increase Target Price to Rs207
We remain positive on ITC after our conference call with management. We are
enthused about the prospects for cigarette volume growth. We factor in 5% volume
growth for FY12 – and note that risks are skewed to the upside – especially given
that excise rates are unchanged this fiscal. The weighted average price hike on the
cigarette portfolio thus far is about 5% - we think this might be a somewhat quiet
year in terms of price hikes, given the aggressive hikes last fiscal (15% initially,
followed by another 5% in 4QFY11). Consequently, we have not factored in any
further price hike into our forecasts.
Other businesses continue to stay the course – non cigarette FMCG losses
continue to trend down in line with expectations, bolstered by lower losses in
retailing and biscuits. We think this is commendable, given the backdrop of soaring
commodity costs.
We have increased our EPS estimates very slightly – ~2-3% over FY12-13E,
essentially re-balancing volume/price assumptions. Our new target price of Rs207 is
based on 25x Sept12E earnings (we roll forward from Mar12E). Our multiple
remains unchanged at this juncture. We note that on both an absolute and a relative
P/E perspective, ITC appears more expensive vis-à-vis its past trading history, but
we believe the re-rating will sustain, given a) continued strength in ITC’s earnings
growth, b) it remains relatively cheap (on a P/E basis) compared with some of the
other better-positioned FMCG names like Nestle, and c) The FMCG pack could
continue to de-rate, given competitive intensity and commodity cost inflation; these
factors could potentially impact ITC across businesses, but to a lesser degree.
Key Takeaways from Management Call
1 – Cigarettes: We are Optimistic on Volume Growth Prospects
Management declined to provide formal guidance on cigarette volume trends, but
indicated that as recently as FY10, cigarette volumes rose c7%, given an
environment of no excise duty hikes. We raise our cigarette volume forecasts to 5%
(4% earlier) and note that upside risks persist.
As regards pricing, the price hikes undertaken in Feb 2011– almost 9% on Gold
Flake Filter, 12% on both Capstan and Bristol and around 20% on Berkeley – imply
an overall price hike of 5%. Leeway to raise prices and margins on account of
coinage benefits exists in Gold Flake RSFT – wherein the brand is priced at Rs38
for a pack of 10 sticks – an increase to Rs40 (customer already pays Rs4/stick)
implies a 5% increase in prices; we estimate this would increase overall pricing by
1% (we estimate Gold Flake is around 20% of revenues).
From a competitive perspective, management noted that competitive intensity is
high – but manageable. Over the last year, initiatives to improve the pack and
smoke profile, and introduction of new brands/variants like ‘Lucky Strike’, ‘Classic
Menthol Rush’, ‘Gold Flake Kings Arctic Menthol’, ‘Gold Flake SLK’ and
‘Player’s Gold Leaf’ strengthened ITC’s market positioning.
2 – GST Implementation: More questions than answers
The implementation of GST by Apr 2012 remains a question mark. However,
assuming it is levied at 20%, it would imply an additional duty of around 4%. ITC’s
weighted average VAT rate is 14.5%, followed by an additional 1.5% for CST, octroi
and state entry taxes.
3 – Personal Care: Revenue growth remains on track
ITC's personal care portfolio revenues are an annualized ~Rs4.8bn (based on FY11
monthly exit rate of Rs400m / month). This compares favorably with ~Rs2-2.5bn in
FY09. For the soaps business, current market share is ~5-6% (volume share).
Mgmt noted that in certain states like West Bengal and Orissa, soaps market share
is in the teens. For shampoos, the market share is around 2-3%. Management also
admitted that the shampoo category is tougher to penetrate and build brands, given
the higher level of customer engagement required. On a separate note, mgmt noted
there have been no signs yet of any consumer down-trading – in either soaps or
shampoos.
The evolution of the personal care portfolio has to be monitored carefully; early
market share gains can easily reverse as a) customer retention is difficult, and b)
soaps are a quasi commodity, especially at the lower end.
The personal care portfolio is expected to break even around 3-4 years from today.
Per our understanding, gross margins are in line with industry players, but lack of
scale results in losses at the EBIT level. We estimate that ad spends in the personal
care space are ~Rs3-4bn annually. With total revenues of Rs5bn and a gross
margin of ~45%, total revenues have to increase at least 1.5x before ad expenses
can be comfortably offset by gross margins.
In terms of the skin care segment, management noted that the fairness cream (Vivel
Active Fair) has now been rolled out across 11-12 states.
4 – 'Other FMCG' losses – being gradually reined in
Mgmt noted EBIT losses in this category as a whole should continue to reduce – in
line with the trends evidenced in 3QFY11. Management noted that the entire other
FMCG portfolio is on track to break even by end FY13 – despite escalating
commodity costs and packaging expenses. This was slightly contrary to our
expectations, wherein we expected that the losses might continue for some time,
given the competitive environment across FMCG categories and the cost pressures
that other players are facing in those segments. The positive variance in this
portfolio continues to be driven by a) lower losses in retailing, and b) biscuits
portfolio’s break even – despite higher input costs. The losses should be contained
to ~Rs3bn in FY11 – in line with 9MFY11 trends.
Retailing business has been restructured – Retail is a shade less than 10% of
revenues of the non cigarette FMCG portfolio. Mgmt undertook a fair bit of store
restructuring in the downturn – at that juncture, Wills stores had been reduced to
48 from 54, John Players stores had seen a more drastic decline – to 230 from
around 270. Both have now seen an uptick in footprint – Wills stores have
expanded to 70 (~50% increase), John Players to 300 (30% increase). Samestore sales growth in retailing has increased to low teens in value terms. Mgmt
noted that there have been no recent price hikes in apparel – and appeared fairly
sanguine about cotton price inflation – contrary to other retailers that have
indicated that margins could be pressured due to escalating cotton cost prices.
Food business – only Bingo! remains unprofitable, for now - Biscuits
comprise 30% of revenues of the foods portfolio. The mix shift strategy that mgmt
undertook from late FY09 (increasing proportion of creams + cookies) has paid
off – and the category has been profitable from late FY10. At present, ITC’s
brands have a low teen’s market share in the biscuits segment. Mgmt noted that
Bingo! remains unprofitable at this juncture – it has around ~10-13% market
share – we believe this category should be profitable in 2-3 years as revenue
growth results in operating leverage benefits.
5 – Agri Business: Benefits from Continued Mix Change
Management's conscious decision to focus on higher profitability products and
move away from lower-margin products like sesame, rice, pulses, etc., in FY09
resulted in EBIT margins increasing to 11% in FY09 (vs. 5.2% in FY08). Leaf
tobacco is at present 50% of category sales – with soya, coffee and wheat
accounting for the rest. Mgmt noted that the margin trend remains favorable –
margins have ranged from 9-16%, averaging 13% over the past 3Qs. Management
expects margins to sustain, though volumes/revenue growth might decline on
account of lower leaf tobacco output due to unseasonal rains in Andhra Pradesh.
6 – Hotels: Gradual rollout of properties continues
Current hotel inventory is 3,100 hotels in the luxury segment, 2,400 under the
Fortune brand (managed properties) and around 1,000 rooms in the heritage
segment (through JVs). ITC’s 600-room Chennai property will be operational mid
FY12, the 500-room Kolkata property is under construction (operational in 2+
years), while two 100-room properties will be added in Bangalore / Delhi.
The ARR was ~Rs9,000 in 3Q – those trends continue. Occupancies have been
growing in the low single digits while ARRs have been growing in the high single
digits. Current occupancy levels are in the high 60s – management noted that
occupancies typically peak out in the mid 70s.
7 – Paperboard and paper: Forecast 10-15% revenue growth
The paper business’ revenues are forecast to increase 10-15%, driven by a
combination of volumes (>10%), with mix and price driving the rest of the growth.
Paper prices will be increased as higher input costs (pulp) are passed through.
Incremental 100,000 TPA of paperboard capacity will be added in FY12.
ITC
Company description
ITC is the leading cigarette manufacturer and marketer in India with about 74%
market share by volumes. The group is ~32% owned by BAT (British American
Tobacco). The company's cigarette portfolio carries strong brands such as Wills,
Gold Flake, India Kings and Scissors, and two of BAT's global brands, Benson &
Hedges and State Express 555. Besides tobacco, ITC operates in other business
divisions, namely a) other FMCG businesses (foods/snacks, personal care,
education & stationary and retailing), b) hotels, c) paper & packaging d) agricultural
commodities business, and, e) IT. However, about 66% of its revenues and 83% of
its profits are from the cigarette business (in FY10). The group has made significant
investments in the hotels, paperboard and processed foods (biscuits, ready-to-eat
foods, confectioneries) businesses.
Investment strategy
We rate the stock as Buy / Low Risk (1L) with a target price of Rs207. The cigarette
business remains the key driver of earnings, given the backdrop of a robust pricing
environment, coupled with modest volume increases and better mix. Thus far, ITC
has been successful in passing through excise duty increases, resulting in strong
margins. Positive cigarette volume growth despite aggressive pricing actions should
enable the stock's recent re-rating to sustain. Over the next few years, ITC's overall
revenue streams should become far more balanced as the non-tobacco FMCG
business attains critical mass (currently c.15% of revenues). We forecast a strong
17% EPS growth CAGR over FY10-12E.
Valuation
Our target price of Rs207 is based on 25x Sept12E earnings. ITC's stock has
experienced a gradual re-rating, as concerns pertaining to cigarette volume decline
(post the excise/VAT imposition) have been largely unfounded, with overall cigarette
volumes growing c.4% over FY09-11E, thus underscoring the resilience and
defensive attributes of the core cigarette business. Moreover, while PAT and
earnings have been somewhat volatile over the past few years, this has been on
account of the different growth trajectories and life cycles of ITC's other businesses,
some of which (i.e. personal care and foods) are at nascent stages of operations
and have yet to attain sustainable cash generation. In FY11 too, the company took
aggressive price increases that offset the excise increases, and augmented the
operating margins. Our target P/E multiple of 25x is above the last three-year
historical trading average (~21x). We note that from an absolute P/E perspective,
ITC is ~15% below peak valuations (around 27-28x). From a relative P/E
perspective, however, ITC appears relatively cheap - trading at around 1.5x - vs. a
peak of around 1.75x.
ITC has a relatively stable earnings stream, so P/E is our primary valuation
methodology.
Risks
We rate ITC shares as Low Risk because the company operates in branded
businesses and its earnings volatility is low. Downside risks that could prevent the
stock from reaching our target price include: 1) With most of its earnings coming
from the tobacco segment, ITC is most at risk from controls and the government's
tax policy. 2) Perceived as being a "sin" industry, the stock is prone to negative
share price reactions. 3) Other significant risks for the company are dilution in
capital efficiency from investments in non-tobacco businesses and the possible
acquisitions of capital intensive businesses that fail to enhance value.
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