>Model Portfolio & Focus List: Adding ITC (MORGAN STANLEY)

• Our Consumer analyst Hozefa Topiwalla believes that competitive pressures amongst consumer staples companies are likely to rise over the next 12-months. Input cost savings have peaked; we think a trend reversal, at least for a few companies, has begun from October 2009. The industry is likely to implement more price cuts, promotional activity, and/or marketing expenditures (see today’s note titled.

• Changes to Focus List: We are adding ITC (Rs249) to our focus list. Hozefa has just upgraded ITC from Equal-weight to Overweight. He argues that ITC is in a strong position in one of the most attractive cigarette markets in the world and is demonstrating strong pricing power. ITC is likely to be largely unaffected by the potential rise in competitive activity in the Home and Personal Care space. ITC’s Paper and Agri businesses are also demonstrating strong margin momentum and the hotels business is expected to recover.

• We fund this change by removing HUL (Rs273) from our focus List. Hozefa has downgraded HUL from Equal-weight to Underweight due to the following reasons:

• Increased earnings growth volatility in the next two to three quarters

• Potential increase in competitive pressures from P&G likely to affect the stock’s multiple

• Cash flow pressures will likely rise as HUL makes investments to gain market share in an environment with greater competitive intensity

• Input cost pressures have begun to rise

We are not making changes to our sector model portfolio which remains biased for a recovery in economic activity. Thus, we believe that consumer and infrastructure sectors will drive growth recovery and, hence, market performance. Accordingly, we are overweight Consumer Discretionary, Industrials, Financials and Energy in our model portfolio while remaining neutral and underweight in technology and materials, respectively.

To read the full report: INDIA STRATEGY