>ITC (ICICI SECURITIES)

Cigarettes to give kick

Budget announcement of nil excise hike for cigarettes is a huge positive for ITC; we expect its cigarettes segment to register volume growth of 5%, net sales growth of 19% and PBIT growth of 18% in FY10E. Complementing this growth, we expect the non-tobacco business’ PBIT to grow a strong 30% YoY in FY10E. Despite the recent run up in its stock price, ITC continues to trade at FY11E P/E of 17.7x, which is not only at a discount to its 5-year one-year forward median P/E of
19.5x but also attractive vis-à-vis peers. Re-iterate BUY and maintain our 12-month target price at Rs238/share.

■ Cigarettes – Expect 5%, 19% & 18% growth in FY10E volume, net sales & PBIT. We expect strong volume growth of 5% in FY10E on the back of nil excise hike and lower base. Due to base effect of price increases and new price hikes, we expect 6- 7% price growth in Cigarettes in FY10E (expect price hikes in some regional brands such as Bristol Filter in the short term). Also, while we expect Cigarettes’ gross sales to grow ~12%, nil excise hike will lead to ~19% growth in net sales and ~18% growth in Cigarettes PBIT in FY10E.

■ Concerns about VAT unwarranted for near term. With Budget announced for most states, we do not expect VAT to increase to 20% in the short term for all states. VAT for cigarettes remains unchanged for the state of Punjab, as per Budget announcement yesterday. Uncoordinated efforts by states to hike taxes on cigarettes will not largely impact ITC due to: i) flow of stocks from neighbouring states ii) high pricing power enabling ITC to absorb the minor impact of VAT increase in few states.

■ Non-tobacco business – All well except Hotels. We expect Non-Tobacco sales to grow 13% in FY10E on the back of strong performance in the paper & paperboard segment. Notably, on account of lower losses in Other FMCG and margin expansion in Paper & Paperboard, we expect Non-Tobacco PBIT to increase 30% YoY. However, we believe Hotels would disappoint and expect 8% decline in FY10E PBIT of the segment.

■ Expect healthy Q1FY10 results. We expect 6.5% YoY volume growth and 25% net sales growth for Cigarettes in Q1FY10E. Overall, owing to poor performance in agri and hotels segments, we expect net sales to grow only 9%. However, due to strong margin expansion in Cigarettes, Agri and Paper & Paperboard, we expect strong PAT growth of 24% in Q1FY10E.

■ Attractive valuations despite recent spike. While the stock has run up 10% in the past two sessions, ITC trades at FY11E P/E of 17.7x, which is not only at discount to its 5-year median P/E of 19.5x but also attractive vis-à-vis peers. Reiterate BUY and maintain our 12-month target price at Rs238/share (FY11E EPS of 20x).

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