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Buy ITC; target of Rs 224: R K Global
September, 29th 2011

R K Global is bullish on ITC and has recommended buy rating on the stock with a target of Rs 224 in its September 22, 2011 research report.

ITC, the Govt. of West Bengal has brought tobacco related products like cigarettes, chewing tobacco and cigar under Schedule D** in August FY12. VAT on these products was increased to ~20% effective from Sep1 FY12 from earlier ~13.5%. However, the state could further schedule a higher VAT level up-to ~30% by FY13E if it doesnt meets its VAT collection targets. In the midst of Q1FY12, Tamil Nadu also increased the VAT on cigarette products to ~20% from ~12.5% earlier.

West Bengal and Tamil Nadu are among the key revenue contributors to the companys cigarette business with a contribution of approximately ~8.3% and ~11% respectively. The other key contributors to the companys cigarette business are Andhra Pradesh (~13%), Kerala (~12%), Maharashtra (~9%) and Karnataka (~9%) who had not hiked or just modestly hiked the VAT rate in their respective state budgets. Given WBs & TNs VAT effect on ITCs FMCG-cigarette business revenue, we dont expect any material impact on the companys earnings, considering the ~6.8% average price increase in the cigarette portfolio.

Recently the company hiked the price of its Classic brand of cigarettes by 10%, Gold Flake King (~4%) & Wills Navy Cut (~6.5%). So, in any way, the company has hiked prices to sub-side the VAT. In-fact, we have factored a ~2.5% rise in FY12E FMCG-cigarette revenue. On the other hand, ITC opened its first retail store selling premium cigar brand 'Armenteros' in Delhi as part of its plans to strengthen its presence in the premium tobacco segment. ITCs cigar category is growing at a rate of ~20% PA in the country on the back of increasing disposable incomes and exposure to global lifestyles. 

Hence we evenly maintain our earnings estimates at ~19.6 (earlier ~18.5) over FY12-13E & NPAT at ~20% (earlier ~19%). At CMP the stock trades at a P/E of ~21.1x of its FY13E EPS of Rs 9.0 & P/BV of ~7x of its FY13E BVPS of Rs 27. We reiterate our BUY recommendation on the stock with a revised price target of Rs 224, having a potential upside of ~15.1% factored over FY13E P/E of ~24.8x of its EPS of Rs 9.0, says R K Global research report.

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