>ITC (HSBC)

Remain Neutral: Factoring in price increases

■ Price increases on the Goldflake brand to add INR0.20 for FY10e EPS but slowdown in hotels reduces gains marginally

■ We still believe that the budget will be the single most important event for ITC; we revise our two scenarios

■ We arrive at a new price target of INR193 (previously INR172) based on SOTP and retain our Neutral rating.


Price increases on Goldflake. ITC has raised the prices of Goldflake Kings from INR4 to
INR4.4 per stick. We had mentioned in our previous report dated 18 February that
Goldflake Regulars is another likely candidate for price increase and we now believe that
the price increase in Kings will be shortly followed by one in Regulars, although the
company has not confirmed this. We believe that the annualised impact of these price
increases on EPS is INR0.88. However, as the budget is due in Q2 FY10, we build in the
impact only for Q1 FY10, which works out to INR0.20.

FMCG, hotels overhang likely to continue. We believe that the situation in the hotel industry is likely to turn out worse than what we had built in our estimates. We therefore reduce our FY10e hotels EBIT by 8.8%. We forecast FMCG losses in FY09e at INR4.6bn and we believe that this will come down to INR3.6bn for FY10e, which is still sizeable. We believe that these concerns are fairly priced in the stock. Our FY10e EPS changes from INR10.23 to INR10.38.

Change in estimates and valuation. Our EPS estimate for FY10e changes from INR10.23 to INR10.38 as a result of increase in cigarettes EBIT by 2.3% and decrease in hotels EBIT by 8.8%. We revise our scenario analysis to take into account these changes, as well as the absence of any tax hikes in Q1 due to the delayed budget this year. Our low tax scenario derives a price target of INR217 and high tax scenario, INR166. We take an average to arrive at our revised target price of INR193 and retain our Neutral rating.

To see full report: ITC