Friday, October 9, 2009


Upgrade in volume growth assumptions likely: We expect ITC's cigarettes business to report 5% volume growth in 2QFY10 following a 5.5% volume growth in 1QFY10. We expect a 22% rise in net sales and 16.7% rise in PBIT in 2QFY10. The cigarettes business faced (1) increased VAT from 12.5% to 20% in Maharashtra, Delhi and Rajasthan (2) pictorial warnings on cigarette packets from 1 July 2009. These were partially neutralized by flat excise rates for FY10. Steady growth despite regulatory headwinds indicates huge demand potential. Our estimates factor in 4% volume growth for both FY10 and FY11 with positive bias for upgrades.

No major impact of Marlboro launch by Godfrey Phillips: Godfrey Phillips, in which Philip Morris owns 25% stake, has begun to market Philip Morris' Marlboro cigarettes (the world's No1 brand). Marlboro is priced at Rs90/20 sticks and will compete with ITC's Classic (Rs94/20 sticks), Benson & Hedges (Rs100/20 sticks) and State Express 555 (Rs100/20 sticks). We estimate this segment accounts for just 7b-8b sticks in the 100b-stick Indian market. Despite increased competition it is unlikely to impact ITC in the premium segment.

ITC set to cut FMCG losses by 20%; hotels under pressure: ITC's new FMCG businesses are on track to reduce losses at the PBIT level by 20% in FY10. The group's hotels business is expected to stay under pressure due to occupancy levels of 55-60% and 10-15% lower ARR (average revenue per room) YoY. The agri-business is expected to report another quarter of steady growth due to strong leaf-tobacco prices. We expect the paper business to gain from rising capacity utilization at new paper and pulp units. Mid teens PBIT growth in cigarettes and strong growth in both paper and agri businesses will enable ITC to post 17% PAT growth in 2QFY10.

Medium-term outlook positive; maintain Buy: We remain positive on ITC in the medium term. Continued traction in the cigarettes business and improved profitability in the agri and paper business is positive. The recovery of the hotels business is delayed but the outlook is likely to improve. Increased cigarettes volume growth can result in subsequent upgrades. We maintain Buy.

To see full report: ITC