ITC - Minor tweaks in packaging rules - IIFL

The government has made minor tweaks in the packaging and labeling rules for cigarettes. The new rule will now also require: 1) insertion of the word "warning" in red font; and 2) maintaining of the aspect ratio of the pictorial warnings. This is against concerns that India would look to implement plain packaging norms similar to those in Australia. We do not expect these minor tweaks to impact cigarette volumes/packaging costs materially. Additionally, media reports indicating ITC's nationwide launch of the 64-mm cigarette should aid market share gains from illegal cigarettes and will be an upside risk to volumes and in turn to earnings. BUY.

Minor tweaks in the cigarette packaging norms: The Ministry of Health and Family Welfare has made minor tweaks in the cigarette packaging rules (effective April 2013). The new guidelines require the insertion of the word "Warning" in red font and that the pack maintains aspect ratio of the health warning to avoid distortion. We do not expect these changes to impact volumes and believe that this would not entail any major change in packaging costs for cigarette manufacturers.

Nationwide launch of 64-mm cigarette remains upside risk: ITC's cigarette volumes have been flat despite sharp increases in excise duty on the back of strong growth in the premium category (Kingsize). In contrast, economy segment have lost volume share to illegal cigarettes (where manufacturers evade taxes). Media reports indicating nationwide launch of ITC's 64-mm cigarette should aid market share gains from these illegal cigarettes and remain an upside risk to volumes.

Reiterate BUY: We expect earnings growth to remain strong in the medium term, underpinned by tailwinds in the cigarettes, other FMCG, and paper segments. Volume growth surprises in 64-mm cigarettes remain an upside risk to earnings and will likely drive earnings upgrades. Reiterate BUY with TP of Rs320/share.

Source : Equity Bulls

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