Buy ITC for 20% upside - Motilal Oswal

ITC: Excise duty concerns provide good entry point post correction; Buy for 20% upside

Pre-budget concern of excise duty switchover from specific duty to ad valorem and/or a steep increase in excise has pulled down the stock price of ITC.

However, we believe ad valorem excise is a precursor to covering cigarettes under GST and many local taxes might be subsumed in this.

We highlight that despite volume uncertainty, ITC's cigarette EBIT has grown at 16% CAGR over FY05-10.

The company has already effected price increase of ~4.5% over the past 2 months which covers for excise increase of ~10%.

We note that ITC stock remains subdued and volatile on the run up to budget due to uncertainty on excise and various tax changes. We believe ITC will gain disproportionately from secular growth in cigarettes as no new MNCs can enter due to non allowance of FDI. We believe recent decline in stock price offers good entry point. On current estimates the stock trades at 21.3x FY12E EPS of Rs7.5 and 18.3x FY13E EPS of Rs8.7. Buy with SOTP target price of Rs190.

Source : Equity Bulls

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