ITC - ‘Healthy Rollback’

India Infoline News Service | Mumbai |

ITC is gaining traction in non-cigarette businesses as well making it a well diversified growth company.

In the Finance Bill amendment, the Government has proposed to withdraw the imposition of ad-valorem duty introduced in the Union Budget and instead increase specific excise duties by ~21-22% depending on the slab. ITC has already hiked blended cigarette prices by ~15-16% (~12% post budget), to partly mitigate the impact. With the revised specified rates, and assuming ~3% decline in cigarette volumes in FY13, we expect ITC to take further price hikes of ~4-5% to pass on the additional burden and maintain 15%+ cigarette EBIT growth. We believe the removal of the ad valorem excise duty on cigarettes will help ITC maintain its pricing power and ability to expand margins on a consistent basis.
 
Removal of ad valorem duty a long term positive
The imposition of ad valorem duty was a structural negative for the cigarettes industry as the leverage to increase margins through price hikes would have reduced (tax/stick would have increased with price hikes). The new structure is expected to result in ~21-22% increase in specific rates (earlier proposal impact ~14-15%). We believe the weighted average impact on ITC’s portfolio would be ~20%. ITC has already increased blended cigarette prices by ~15-16% and will require ~4-5% further price hikes to pass on the additional burden and maintain 15%+ cigarette EBIT growth. ITC has not yet hiked prices of brands like Capstan while in the king-size cigarettes, the price hikes have been comparatively lower. We believe this gives enough headroom for ITC to take further price hikes.
 
New excise slab offers opportunity to re-enter <65mm segment
The new slab of lower excise duty for cigarettes below 65mm in length provides opportunity for ITC to re-enter this segment. ITC had exited the Rs2-2.5/stick price point post the excise duty increase in FY11. In the FY13 Budget, the Government has introduced a new slab of <65mm cigarettes with a lower excise rate of Rs0.66/stick (ITC is present from 69mm). This slab will not attract ad valorem tax thus providing opportunity for ITC to re-enter this segment with a 64mm offering at Rs2-2.5/stick price point.
 
Margins to expand; earnings to witness ~17% CAGR
ITC remains one of our top picks in the sector given the strong resilience in its core cigarette business. ITC is gaining traction in non-cigarette businesses as well making it a well diversified growth company. We expect ITC to witness 14.3% and 17.2% CAGR in revenues and net profit respectively over FY12-14. At the current market price of Rs240, the stock is trading at 22.3x FY14E EPS of Rs10.8. We maintain Buy.
 
Financial summary
Y/e 31 Mar (Rs m)
FY11
FY12E
FY13E
FY14E
Revenues
211,676
245,790
279,808
320,833
yoy growth (%)
16.6
16.1
13.8
14.7
Operating profit
71,534
86,752
100,717
118,051
OPM (%)
33.8
35.3
36.0
36.8
Reported PAT
49,876
60,718
70,914
83,343
yoy growth (%)
22.8
21.7
16.8
17.5
 
 
 
 
 
EPS (Rs)
6.4
7.8
9.2
10.8
P/E (x)
37.2
30.6
26.2
22.3
Price/Book (x)
11.6
10.7
9.7
8.8
EV/EBITDA (x)
25.7
21.0
18.0
15.2
Debt/Equity (x)
0.0
0.0
0.0
0.0
RoE (%)
33.2
36.4
38.9
41.4
RoCE (%)
46.0
50.6
54.1
58.0
Source: Company, India Infoline Research

BSE 266.50 4.80 (1.83%)
NSE 266.75 4.55 (1.74%)

***Note: This is a NSE Chart

 

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