>ITC: BUDGET IMPACT (UBS)

■ Excise duty increased; new format of cigarettes allowed
Prima facia, the Budget is negative for the cigarette business, the excise duty has been raised by 11-18% for King Size and RSFT which is higher than we assumed. The Budget has introduced a new format for cigarettes at <60mm>

■ Positive for hotel business
ITC however, will gain from an investment-linked tax incentive of 100% deduction in respect of the whole of capex in the hotel business. ITC will be commissioning a 600-room hotel in FY11E, we believe the tax incentive on the capex should contribute to c.3% to PAT estimates.

■ Interim growth higher, EPS remains unchanged
We do not change ITC's estimates for FY11E but reduce price target from Rs325 to Rs300, given a worsening margin profile of the cigarette business in the near term. In our interim period, however, the estimated volume growth in the cigarette business improves from the 4.2% trend growth in volumes to 5.5%, as the microfilter segment should emerge as a volume driver in the cigarette business.

■ Valuation: ITC is our top pick, price target of Rs300
We derive our price target from a DCF-based methodology and explicitly forecast long-term drivers with UBS’s VCAM tool. Our price target of Rs300 assumes an interim growth rate of 12% and a WACC of 11.6%.

To read the full report: ITC