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UBS Investment Research
ITC
I ndian tobacco kings [EXTRACT]
VAT increase noise presents opportunity to buy
The recent VAT increases by states have had some impact on the share price.
However, we believe this is not warranted. ITC has raised prices to pass on the
VAT increases and we expect it to benefit as it raised prices throughout India not
just the states that increased VAT. We view the impact on the share price as a
buying opportunity.
ROE improvement
ROE has improved from 28.4% in FY00 to 31.3% in FY11 due to increases in net
income margin and asset turnover. The improvement in net margin is a result of the
improving margins in the cigarette business. ITC has delivered consistent
shareholder returns through economic cycles, despite increases in excise duties or
VAT.
Key catalysts ahead
In our view, the key catalysts for ITC’s share price include: 1) quarterly volume
growth; 2) higher cigarette prices; 3) an improving consumer environment; 4)
declining losses in the FMCG business; and 5) improvement in payout ratios.
Valuation: maintain Buy rating, and price target of Rs240.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool (assuming a 10.5% WACC
and a 12% interim growth rate). At our price target, ITC would trade at 25x one
year forward PE.
ITC
ITC is the leading cigarette manufacturer in India with a 67% share of the
market by volume and 83% by value. ITC has identified tobacco and
paperboard, hotels and agribusiness as its core businesses.
Statement of Risk
We believe a higher excise duty is the key risk to ITC’s earnings growth and our
valuation. A steady increase in excise duty would adversely affect the
company’s long-term growth trend and lead to lower purchases by smokers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
ITC
I ndian tobacco kings [EXTRACT]
VAT increase noise presents opportunity to buy
The recent VAT increases by states have had some impact on the share price.
However, we believe this is not warranted. ITC has raised prices to pass on the
VAT increases and we expect it to benefit as it raised prices throughout India not
just the states that increased VAT. We view the impact on the share price as a
buying opportunity.
ROE improvement
ROE has improved from 28.4% in FY00 to 31.3% in FY11 due to increases in net
income margin and asset turnover. The improvement in net margin is a result of the
improving margins in the cigarette business. ITC has delivered consistent
shareholder returns through economic cycles, despite increases in excise duties or
VAT.
Key catalysts ahead
In our view, the key catalysts for ITC’s share price include: 1) quarterly volume
growth; 2) higher cigarette prices; 3) an improving consumer environment; 4)
declining losses in the FMCG business; and 5) improvement in payout ratios.
Valuation: maintain Buy rating, and price target of Rs240.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool (assuming a 10.5% WACC
and a 12% interim growth rate). At our price target, ITC would trade at 25x one
year forward PE.
ITC
ITC is the leading cigarette manufacturer in India with a 67% share of the
market by volume and 83% by value. ITC has identified tobacco and
paperboard, hotels and agribusiness as its core businesses.
Statement of Risk
We believe a higher excise duty is the key risk to ITC’s earnings growth and our
valuation. A steady increase in excise duty would adversely affect the
company’s long-term growth trend and lead to lower purchases by smokers.
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