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Research
Buy ITC - CMP: Rs.292, TP: Rs.330 - Prabhudas Lilladher
Posted On : 2013-03-11 20:50:41( TIMEZONE : IST )
Cigarettes: second year of hefty excise increase to moderate EBIT growth: FY14 budget has proposed 18% increase in excise duty (except <65mm cigarettes) post 20% increase in FY13. We have not observed any such precedence of duty increase in past two decades. VAT rate had increased by 280bp last year and is expected to increase by another 200bp in the current year increasing the cascading effect. We expect ITC to increase prices by ~14-15% which will reduce volume growth to ~1% in FY14 primarily saved by national launch of 64mm cigarette which has 50% lower excise duty than <70mm cigarettes. We expect moderation in EBIT growth to 15% in FY13-15 from an average of 20% over FY11-13.
Non cigarette business to rebound after poor show in FY13: ITC's non cigarette business is expected to post just 6% EBIT growth in FY13 due to 1) sharp 50% decline in hotels business EBIT due to higher costs, new properties and slowdown 2) low top line growth and margin pressure in paper business. However we expect the EBIT growth to average 30% over FY13-15 led by 1) recovery in hotel business from low base 2) commissioning of a new paper board unit and 3) expected EBIT breakeven in FMCG business by FY14 with expected delta of Rs3b by FY15. The share of non cigarette EBIT has declined from 19.5% in FY12 to ~17.5% in FY13; we expect it to increase it to 21.5% by FY15.
PAT growth visibility remains strong, Buy with a target of Rs330: Despite sharp increase in excise duty in recent budget, growth visibility remains strong driven by strong pricing power and continued success of 64mm cigarettes. We believe the performance of non cigarette businesses has bottomed out and should start improving in the coming quarters. We are concerned with sharp double digit excise duty increase for 2nd year in succession; however we are not considering it as a sustainable trend for coming years. We value the stock at 25xFY15E EPS of Rs13.2 thus assigning a price target of Rs330/share.
