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Recent discussions with ITC’s management reinforced our positive stance on the
company. While uncertainty related to excise hikes could constrain near-term
share price performance, we would use any weakness in the stock price as a
buying opportunity. ITC has outperformed the broad market by 33% YTD and in
the current volatile markets, we think it should do relatively better than its peers.
Cigarette demand trends remain encouraging and we expect ITC to register
mid to high single digit volume growth in FY12. The premiumisation trend
continues with the Kings segment (~15%+ volume share) growing ahead of the
Regular segment, and this should be positive for margins. The company has
taken ~5% price hike on wtd. avg. basis and any further price increases could
add to earnings upside. Procurement costs for leaf tobacco remain stable,
further supporting margin growth. Market share trends remain healthy.
Tobacco and Taxes. There has been an uptick in VAT rates in most states this
year with the blended VAT rate for ITC rising from 15% in FY11 to ~17.5%
this year. VAT being an ad-valorem tax (charged on MRP) has a more adverse
impact on margins compared to excise, hence any further significant increase
in VAT levels would be a concern. In addition, there are concerns related to
the extent of excise duty hikes likely on cigarettes in FY13, particularly against
the backdrop of no change in excise rates in FY12. As demand trends are
healthy, we believe the industry can absorb excise duty hikes of up to 10%
(implying price hikes of 4-6%) without impacting demand meaningfully. At
constant prices we estimate current sensitivity to earnings of excise duty is 1%.
Non-tobacco business update. Other FMCG continues to see healthy
revenue growth and better profitability benefiting from mix improvement in
foods, consolidation of market share gains in soaps and extension of skin
care portfolio on a national basis. Paper business expansion and performance
remain on track with product mix improvement (share of value added paper
now 50%+) a key driver for realisation/margin growth. Hotel business
performance, which was below expectations in the June’11 qtr, could be
adversely impacted with the slowdown in overall economic growth.
Maintain OW. We build the higher VAT rates into our earnings model and now
expect ITC to deliver an EPS CAGR of 17% over FY11-13E. We roll our SOTP
price target end date to Sep-12, bringing it to Rs217 vs Rs209 (Mar-12)
previously. We find current valuations reasonable and see the stock as attractive
relative to other staple names. We believe high FCF generation could result in
higher dividend payout in the medium term as capex needs are likely to remain
limited to Rs15-18bn per annum.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Recent discussions with ITC’s management reinforced our positive stance on the
company. While uncertainty related to excise hikes could constrain near-term
share price performance, we would use any weakness in the stock price as a
buying opportunity. ITC has outperformed the broad market by 33% YTD and in
the current volatile markets, we think it should do relatively better than its peers.
Cigarette demand trends remain encouraging and we expect ITC to register
mid to high single digit volume growth in FY12. The premiumisation trend
continues with the Kings segment (~15%+ volume share) growing ahead of the
Regular segment, and this should be positive for margins. The company has
taken ~5% price hike on wtd. avg. basis and any further price increases could
add to earnings upside. Procurement costs for leaf tobacco remain stable,
further supporting margin growth. Market share trends remain healthy.
Tobacco and Taxes. There has been an uptick in VAT rates in most states this
year with the blended VAT rate for ITC rising from 15% in FY11 to ~17.5%
this year. VAT being an ad-valorem tax (charged on MRP) has a more adverse
impact on margins compared to excise, hence any further significant increase
in VAT levels would be a concern. In addition, there are concerns related to
the extent of excise duty hikes likely on cigarettes in FY13, particularly against
the backdrop of no change in excise rates in FY12. As demand trends are
healthy, we believe the industry can absorb excise duty hikes of up to 10%
(implying price hikes of 4-6%) without impacting demand meaningfully. At
constant prices we estimate current sensitivity to earnings of excise duty is 1%.
Non-tobacco business update. Other FMCG continues to see healthy
revenue growth and better profitability benefiting from mix improvement in
foods, consolidation of market share gains in soaps and extension of skin
care portfolio on a national basis. Paper business expansion and performance
remain on track with product mix improvement (share of value added paper
now 50%+) a key driver for realisation/margin growth. Hotel business
performance, which was below expectations in the June’11 qtr, could be
adversely impacted with the slowdown in overall economic growth.
Maintain OW. We build the higher VAT rates into our earnings model and now
expect ITC to deliver an EPS CAGR of 17% over FY11-13E. We roll our SOTP
price target end date to Sep-12, bringing it to Rs217 vs Rs209 (Mar-12)
previously. We find current valuations reasonable and see the stock as attractive
relative to other staple names. We believe high FCF generation could result in
higher dividend payout in the medium term as capex needs are likely to remain
limited to Rs15-18bn per annum.
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