Dominance to continue… maintain Buy
ITC remains one of our top picks in the sector given the
strong resilience in its core cigarette business. At current
market price, the stock is trading at 22.6x FY17E EPS of
`17.4, a discount to large caps like HUL and Nestle. The
current valuations ignore positives such as ITC’s dominant
position in the cigarettes business and the consistent
strong performance of its other-FMCG business. The health
ministry’s proposal to ban sale of loose cigarettes is likely
to go in for a review following objections by some MPs,
including some Union ministers, and farmers associations.
They are against taking drastic regulatory steps that would
affect the livelihood of tobacco growers. The notifi cation
regarding graphic health warnings on packs from 1st April,
2015 could impact volume growth. However, we believe
the impact of this will be cushioned since ~70% of the
cigarettes are sold in loose format in India. We believe the
low double digit price hikes taken by ITC post the budget
will help it post mid-high teens growth in cigarettes
segment.
Strong resilience in cigarette business
ITC’s cigarette business continues to display resilience with
stable earnings growth and healthy margin expansion
despite heavy tax burden and regulatory restrictions. In its
FY15 budget, Government increased duties on the 64mm
cigarette segment by 72%, reducing its attractiveness vs.
69mm segment. Excise duties on other segments were
increased by 11-20% (11% in longs, 17% in regular, ~20%
in kings). The weighted average impact on ITC is expected
to be ~20% (annualised) increase in tax. It was steeper
than expected but was signifi cantly lower than the fears
of doubling the excise duty. We believe ITC will be able to
manage it in terms of delivering EPS growth as micro fi lter
cigarettes (64mm) account for mere ~10% of ITC’s total
cigarette volumes.
ITC remains one of our top picks in the sector given the
strong resilience in its core cigarette business. At current
market price, the stock is trading at 22.6x FY17E EPS of
`17.4, a discount to large caps like HUL and Nestle. The
current valuations ignore positives such as ITC’s dominant
position in the cigarettes business and the consistent
strong performance of its other-FMCG business. The health
ministry’s proposal to ban sale of loose cigarettes is likely
to go in for a review following objections by some MPs,
including some Union ministers, and farmers associations.
They are against taking drastic regulatory steps that would
affect the livelihood of tobacco growers. The notifi cation
regarding graphic health warnings on packs from 1st April,
2015 could impact volume growth. However, we believe
the impact of this will be cushioned since ~70% of the
cigarettes are sold in loose format in India. We believe the
low double digit price hikes taken by ITC post the budget
will help it post mid-high teens growth in cigarettes
segment.
Strong resilience in cigarette business
ITC’s cigarette business continues to display resilience with
stable earnings growth and healthy margin expansion
despite heavy tax burden and regulatory restrictions. In its
FY15 budget, Government increased duties on the 64mm
cigarette segment by 72%, reducing its attractiveness vs.
69mm segment. Excise duties on other segments were
increased by 11-20% (11% in longs, 17% in regular, ~20%
in kings). The weighted average impact on ITC is expected
to be ~20% (annualised) increase in tax. It was steeper
than expected but was signifi cantly lower than the fears
of doubling the excise duty. We believe ITC will be able to
manage it in terms of delivering EPS growth as micro fi lter
cigarettes (64mm) account for mere ~10% of ITC’s total
cigarette volumes.
