Buy ITC - Cigarettes - second year of hefty excise increase to moderate EBIT growth - Prabhudas Lilladher

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 the past two decades. VAT rate had increased by 280bps last year and is expected to increase by another 200bps in the current year which has increased the cascading effect. We expect ITC to increase prices by ~15-16% 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 noncigarette business is expected to post just 6% EBIT growth in FY13 due to 1) sharp 50% decline in EBIT of hotels business due to higher costs, new properties and slowdown 2) low top-line growth and margin pressure in paper business. However, we expect EBIT growth to average at 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 Rs3bn 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 the 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 the second 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.

Source : Equity Bulls

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