India Equity Research Reports, IPO and Stock News
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● We assume coverage with an OUTPERFORM rating and a target
price of Rs226 (based on DCF, 29x fwd. P/E). At 26x fwd P/E, we
find ITC’s valuation rich; however, we prefer ITC to HUL due to its
superior growth profile and relative discount.
● Drivers for cigarette consumption in India are strong (favourable
penetration, rising affordability, only 14% of tobacco consumption
as cigarettes), but volume growth over the past decade has been
a modest 3% (attributed to punitive taxation). We believe that
although duty increases will continue, no increase in central
excise duty in FY12 would enable volumes to recover.
● We also expect margins to stay resilient due to the consolidated
nature of the industry and the fact that raw material cost accounts
for a small proportion of sales. ITC’s diversification efforts have
seen a marked acceleration over the past decade and its noncigarette
business accounts for over 40% of sales and 20% of
profit. We expect the profit mix to shift more in favour of new
segments.
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