ITC A Buy, Target at R240

Source from:  Financial Express 09/09/2011

West Bengal state budget has raised VAT on tobacco products (including cigarettes) to 20% from 13.5%. The state would account for 7-9% to ITC's revenue sales, and hence we estimate that ITC needs to do a nominal 0.5% weighted average increase in prices to neutralise impact. We see limited impact, and maintain Buy rating on the stock with a target price of R240. The state budget of West Bengal recently raised the VAT on tobacco products including cigarettes from 13.5% to 20%. While we do not have exact contribution of West Bengal to ITC's revenues, we believe the state contributes 7-9% of ITC's cigarette revenues. The weighted average impact on ITC's overall portfolio is not material to cause any impact either on its margins or on its volume sales. We expect ITC to raise prices of some its brands in the premium segment to neutralise the impact. Recent VAT increases are a growing cause of concern as it has a cascading impact on ITC's tax incidence. Tamil Nadu (12.5-20%), Assam (12.5%-20%), Gujarat (12.5-25%) and Rajasthan (12.5%-40%) had also increased VAT on tobacco products. However, the only positive aspect has been the attempt to create awareness of the ill-effects of other formats of tobacco like banning of "sachet", packaging, and media publicity of ill-effects of chewing tobacco on health. This can over time shift the dual users of cigarettes and these formats of tobacco to cigarettes. We expect ITC to sustain the 8% volume growth recorded in the 1QFY12, and expect ITC to record a 6-7% volume growth for FY12. This volume recovery has to be viewed in the context the 2.8% volume decline which ITC recorded in FY11 due to sharp price hikes. In FY12, the volume recovery gathered momentum in 2HFY11, and hence we are expecting some softness in volume growth in the later quarters of FY12. ITC's other FMCG business could be the next value driver. We expect the business break-even in FY13 and an EPS growth estimate of 19% as the business is reaching critical scale in many segments. Overall it would have a revenue of R5,300 crore in FY12. Enditem