ITC rated ‘Buy’ by Jefferies, says no risk to 6% volume growth assumption

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Updated: February 4, 2017 2:09:22 AM

Cigarettes excise duties have been raised by c.6% for FY18. It’s the sixth consecutive year of excise duty increase; however, the magnitude of the increase is mild as compared to previous years.

ITC has a pricing power and we don’t see a risk to our 6% volume growth assumption for FY18, said Jefferies. (Image: Reuters)ITC has a pricing power and we don’t see a risk to our 6% volume growth assumption for FY18, said Jefferies. (Image: Reuters)

Cigarettes excise duties have been raised by c.6% for FY18. It’s the sixth consecutive year of excise duty increase; however, the magnitude of the increase is mild as compared to previous years. ITC has a pricing power and we don’t see a risk to our 6% volume growth assumption for FY18. Focus now shifts to proposed rates under the GST regime. ITC is currently trading at P/E of 24.1x on our FY19E EPS estimates; maintain Buy.

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Sixth consecutive year of excise duty increase: The government has raised cigarette excise duties by c.6% for FY18, an increase for the sixth consecutive year. All the segments (including less than 65 mm) witnessed c.6% excise duty increase, the lowest in the past six years. The company will take price increases to offset this excise duty increase. While the punitive excise duty regime on cigarettes has forced ITC to take a sharp price increase and hurt volumes in the past, FY18 looks like a benign year for cigarette volumes (we are building in 6% volume growth for FY18 currently).

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Valuation/Risks: We arrive at our price target of Rs 297.49 for ITC by using a sum-of-the-parts (SoTP) valuation. The cigarettes business contributes R231 to our fair value (arrived at by a DCF), while other FMCG businesses contribute Rs 48.0 (valued at 5.5x EV/Sales which is in line with where Hindustan Unilever is currently trading), Hotels Rs 2.9, Agri R9.4 and R6.4 is contributed by the Paper business. ITC is currently trading at P/E of 24.1x on our FY19E EPS estimates, which is c.20% discount to the broader fast moving consumer goods (FMCG) sector. Risks: The proposed GST framework is a potential negative for ITC if the combined incidence of Excise Duty and GST is not revenue neutral.

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Company description

ITC is the market leader in the Indian cigarette industry with a 75% volume share. In addition to cigarettes, which form 65% of its revenues, the company has a diversified presence across the consumer staples, branded foods, paper, hotels and retailing businesses.

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