Price Target = Rs. 220
Market Cap = Rs. 61,206 cr
Highlights:
- ITC had been underperforming the market owing to fears of the implementation of the value-added tax (VAT) and a hike in the excise duty on cigarettes. Finally in this budget, the excise duty on cigarettes was increased by 5% and the hike was at the lower end of the expectations. Moreover with no change in the additional excise duty, the fear that VAT may be levied sometime in the near future has been allayed. The likelihood
that the government may allow VAT on cigarettes through a separate amendment also appears low. - Cigarettes.excise duty increased by 5%
The total excise duty on cigarettes has increased by 5% and the excise outgo currently forms 60% of the gross sales on cigarettes. In our view, ITC will effect a weighted average price hike of around 3% to pass on this tax increase to the consumer. The same, we believe, is on the lower side. It is likely that ITC will be able to maintain a 7-8% volume growth in cigarettes in FY2008. - Tax on bidis increased
It appears that the government has tried to widen the tax net on tobacco by raising excise duty from Rs 7 to Rs 11 per thousand units for non-machine made bidis and from Rs 17 to Rs 24 per thousand units for machine made bidis. The government has also imposed stringent declaration norms for bidi manufacturers producing below 20 lakh bidis. In our view, this is likely to improve the long-term volume growth prospects for the cigarette industry.
At the current market price of Rs162, the stock is attractively quoting at 18.4x its FY2008E earnings per share and 11.6x FY2008E enterprise value/earnings before interest, depreciation, tax and amortisation. - I maintain our Buy recommendation on ITC with a price target of Rs 220.
