Recommendation: Buy
CMP = Rs 193
Price target: Rs 247
Key points:
- In the 2008-09 budget, excise duty rates on non-filter cigarettes have been raised to bring them at par with the duty on the filter cigarettes of corresponding length. For the non-filter plain category (>60mm <70mm), the excise duty has been increased from Rs546/1,000 to Rs 1,323 / 1,000 whereas that for the micro category (<60mm) has been increased from Rs 168 / 1,000 to Rs 819/ 1,000.
- The excise duty on filter cigarettes remains unchanged. At present, cigarettes attract duty at varying rates depending upon their length and whether they are filter or non-filter. The steep hike in the excise duty on non-filter cigarettes will have a negative impact on non-filter cigarette volumes of the cigarette industry.
- The impact of the excise duty hike will be marginal on ITC, as only 20% of the overall cigarette volume of the company is generated from non-filter cigarettes. The proposed increased in the excise duty (up 142% for non-filter Plains and higher by 388% for non-filter Micros) will see large volume losses for bidis and non-filter cigarettes. ITC has brands such as Scissors,
- With about an 80% market share in the filter cigarette segment and new launches under the regular category of filter segment (filer cigarette - <70mm, which contributes around 65% of ITC's cigarette sales), ITC would capture a large population that would be shifting from non-filter to filter cigarettes. Due to the large volume shift, filter cigarette volume may grow by 4.1% in FY2009. Consequently, the overall volume growth estimate for FY2009 is down to 2.8% from 5% earlier. And the FY2009 EPS estimate is down by 0.9% to Rs 9.80.
- Effective price hikes across filter cigarette segment and strong performance by the other businesses will lead to a 17.7% growth in the net profit of ITC to Rs 3,689.2 crore in FY2009. That would be 1% less than our earlier estimate of Rs 3,725.2 crore. The company's multiple revenue drivers will help it post a strong growth going forward. At the current market price of Rs 193, ITC trades at 19.7x its FY2009E EPS of Rs 9.80.
- I maintain Buy call on the stock with a price target of Rs 247 over next 3 months.
