Regulation taking firm grip…ITC :: ICICI Securities, link

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Regulation taking firm grip…
The Health Minister has announced that the Ministry of Health has
accepted the expert committee recommendation on prohibition on sale of
loose or single stick of cigarette, increasing the minimum legal age for
sale of tobacco products, increasing the penalty amounts for violation of
certain provisions of the Cigarettes and Other Tobacco Products
(Prohibition of Advertisement and Regulation of Trade and Commerce,
Production, Supply and Distribution) Act, 2003 (COTPA), as well as
making such offences cognizable. The draft note for the Cabinet has also
been circulated for the inter-ministerial consultation. We believe these
recommendations would be discussed in the Cabinet meeting and may
be amended before any notification. However, the government has
already notified stamp health warnings across 85% of the surface of
cigarette packs and other tobacco products, which will be implemented
from April 1, 2015.
Implementation of these recommendations would negatively impact
cigarette companies as it would result in a further de-growth in volume.
The industry has already seen three consecutive years of excise hike
(cumulative ~70% in the last three years), which led to an industry wise
volume de-growth (5-7%). We believe the industry may come out with
new innovative strategies like smaller size (with one, two or four
cigarettes packs) packs to protect the volume decline. However, a decline
in volumes is imminent if the ban on loose cigarettes is implemented.
We believe volume dip is the major concern for both ITC and VST
Industries and these regulations would be an overhang on cigarettes
stocks in the medium-term. However, we await any change in revenues,
earnings estimates until the government comes out with the notification.
We value ITC on an SOTP basis and maintain our target price of | 387
with HOLD rating. We value VST Industries at 18x FY17E EPS of | 104.7
(30% discount to ITC) and arrive at a target price of | 1872/share. We
maintain our HOLD recommendation.

LINK
http://content.icicidirect.com/mailimages/IDirect_Cigarettes_QC_Nov14.pdf