Buy ITC
Published on Thursday, November 19th, 2009 at 12:02 PMAuthor: insightt95in (169 Articles)
ITC
Buy
Price: Rs259 Target Price (Dec-10): Rs300
GST not a major worry; most other segments
in a sweet-spot
We re-iterate ITC as our top pick in consumer sector; ITC’s cigarettes
story is our favourite Indian consumer theme as it remains largely
insulated from most of the worries that could plague other names in
the sector, viz. consumption wind-down, competitive intensity & cost
spike. One likely positive from the recently released GST (Goods &
Services Tax) discussion paper is the elimination of non-uniform statetaxes
on cigarettes, which are currently decided by each states
individually – distorting the concept of the ‘Indian Common Market’.
The paper proposes to include tobacco in GST net & also allows centre
to levy excise over & above GST. As per our estimates, a combined
20%-GST rate (likely a worst-case scenario) plus 5% excise hike in
F11E entail a maximum cigarettes price hike of c.10% to enable ITC to
fully offset the entire additional tax burden. Buy.
* What does the GST document say? Tobacco products would be
subjected to GST with input tax credit. Centre may be allowed to levy
excise duty on tobacco products over and above GST without input tax
credit. GST will, inter-alia, subsume excise, VAT, luxury tax, entry tax not
in lieu of octroi. We estimate that non-VAT state taxes currently comprise
c.1-2% of ITC’s cigarettes turnover. The Empowered Committee suggested
a two-rate GST structure: a lower one for necessary items & goods of
basic importance and another standard rate for general goods.
* What are the implications? The uncertainty at present relates to the
rate which will finally be applicable. We examine three scenarios: 12.5%
(prevailing VAT rate), 15% & 20%. It is likely that combined centre plus
state GST rates will be higher than present VAT rate of 12.5% as it also
subsumes excise duty for all other products. Assuming the rate finally
settles at 15%-20%, we believe that a 3-7% price hike will help offset the
entire additional burden in respective scenarios. In the event of a 5%
excise hike next year, ITC will need to take up prices by 5-10% to fully
offset both the additional excise & GST burden. We believe that with ITC’s
cigarettes business now operating entirely in higher-end filter space,
volume can still grow in F11E even with a 5-10% price hike, especially
since pricing environment in F10 has been reasonably moderate.
* How do the other businesses stack up? A key positive from ITC’s
recent 2QF10 performance was that growth from diversification ventures
(non-cigarettes segments) has outpaced cigarettes growth, despite 50%-
plus decline in hotels profits. Even after adjusting for likely seasonality in
agri-profits, non-cigarettes segments’ profits grew c.50% YoY (reported
growth: 103%) as FMCG losses fell 27%YoY to Rs850mn. All businesses
(except hotels) are in a sweet-spot as ITC derives benefit from backward
integration (paperboards), portfolio restructuring (agri) & carefully crafted
cost strategies (FMCG-Others’ losses reduction is a result of packaging &
logistics-led cost savings rather than mere oil-price led benefits). Hotels
witnessing initial recovery signal which is expected to gain pace in 2HF10.
Note: More intra-day opportunities will be provided
live during the market hours
For More information Visit : http://www.insighttechnical.net
Email : contact@insighttechnical.net
Contact : +91 982222686
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