ITC - Smoking Gold! - Reliance Securities

Event: ITC has taken another round of price hike for its Gold Flake Regular brand by ~2% from Rs58/10 cigarette sticks to Rs59/10 cigarette sticks. The net increase in prices for the Gold Flake (regular and premium brands) post the Union Budget is ~7% (from Rs55/10 cigarette sticks to Rs59/10 cigarette sticks.

Our take on the event: We had already factored into our numbers the price increase of Gold Flake Regular Filter from Rs55/10 cigarette sticks to Rs58/10cigarette sticks post the Union Budget (refer our event update note – "ITC bites the butt; takes 17% price hike across its cigarette portfolio", dated April 16, 2013). The cumulative ~17% price hike taken by ITC on its cigarette portfolio post the Union Budget 2013-14, would have largely negated the increase in specific excise duty and phenomenal increase in state VAT on cigarettes in our view. And hence, further increase of ~2% in its Gold Flake Regular Filter brand positively surprised us. Gold Flake Regular (69mm) is 25-30% volume contributor to ITC's cigarette business and the current price of the brand is at par with its mid-premium Wills Navy Cut (74mm) cigarette brand. Hence, the price increase is expected to encourage consumers to uptrade to the premium cigarette brands of ITC, thereby aiding value growth.

We estimate the cigarette business revenue to grow at 13-14% yoy aided by ~17% price realization and negative volume growth of 3-4%. The EBIT margin for the division is expected to be maintained at 32% (same as FY2013). In case our assumption of uptrading to premium brands by consumers owing to price increase holds true, the EBIT margin for the division is expected to inch up to ~33% depending on the extent of uptrading.

Outlook and Valuation

We are positive on ITC as the company has always managed to report strong cigarette margins despite increase in state as well as central excise duties on tobacco, thus displaying an ability to successfully pass on the increase in its cigarette prices. Further, the company's non-cigarette FMCG business is on a roll recording 25-30% yoy growth for the past 2-3 quarters on increasing market share of its packaged foods business (Sunfeast and Bingo). Over FY2013-15E, we pencil-in 15% CAGR in the revenue for the company aided by 13% CAGR in the FMCG business and ~20% CAGR from the non-FMCG business over the same period. Normal monsoons and operational efficiencies are likely to aid margins to ~37% in FY2014E and FY2015E. We peg an Earnings CAGR of ~19% over FY2013-15E. At CMP, we reiterate our Accumulate view on ITC with a Target Price of Rs375.

Risks to the view

- Delay in absorption of price hikes taken holds a downside risk to our estimates
- High inflationary environment could impact our estimates
- Lower revenue traction from Non-cigarette FMCG business could impact our estimates

Source : Equity Bulls

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