ITC Cluster: Apple Green Recommendation: Buy Price target: Rs275 Current market price: Rs245
Smokers to pay more
As anticipated by us, ITC has implemented price hikes in the range of 2-18% for the majority of the cigarette brands in its portfolio (over 60% of sales volume). The same is evident from the table below. The price increase in the cigarette business as a whole stood at 10%, which is line with our expectation of 10% for FY2011.
The key things to watch for in the near term are the quantum of the increase in the VAT to be announced by states in their respective budgets and the details of the launch of the micro filter cigarettes. Though we expect the price increases to taper down the cigarette sales volume growth, ITC?s cigarette business that has shown strong resilience to price hikes in the past has the potential to beat our as well as the street?s expectations. Also, the other businesses of the company are witnessing a strong upmove. Hence, we maintain our Buy recommendation and price target of Rs275 on the stock. At the current market price the stock trades at 20.2x its FY2011E earnings per share of Rs12.1 and 17.4x its FY012E EPS of Rs14.1.
MARKET OUTLOOK
Building a base
In line with our expectation, the markets have managed to stay in a narrow range, hovering around 5000 levels (+/-5%) on Nifty, for the past few months. It withstood the global tremors emerging out of sovereign debt crisis in eastern Europe and domestic issues such as rising inflation and sedate earnings upgrades since October 2009. India?s recent outperformance compared to some of the other emerging markets is driven by the relatively better economic revival that is backed by sustainable domestic consumption story.
The Union Budget 2010-11 has also cheered the market sentiments, as the finance minister managed to strike a fine balance between fiscal consolidation and growth stimulus. Moreover, the Union Budget has also emphasised on the key themes of investment in infrastructure development (increase in plan outlays), growth in consumption demand (higher tax slabs and rural programs) and divestment.
Though the market is moving towards the higher-end of its multi-month trading range, we believe it might not be ready to break free yet. The lack of earnings upgrades and expected monetary tightening by the Reserve Bank of India (RBI) in its forthcoming policy review meet in April 2010 would act as a drag on the market. Moreover, in the near-term, there are technical issues such as withdrawal of liquidity due to advance tax payments and clean up of accounts prior to the end of the fiscal year. Globally, the economic revival in the US and relatively weaker environment in Europe could further strengthen the US dollar, resulting in some pressure on foreign inflows in the coming months.
Given the lack of any re-rating triggers in the near-term, we maintain our thesis that the markets are likely to remain range-bound and consolidate during the first half of 2010. As against this, the second half should see the focus of investors gradually turning away from the near-term issues to the long-term potential of the Indian economy and the strong corporate earnings in FY2011 and beyond. Moreover, with passage of time the valuations would turn more compelling as the street rolls over discounting to FY2012 earnings estimates.
Consequently, we maintain our ?buy on dips? stance and view any significant correction or knee-jerk reaction to global events as an opportunity to accumulate fundamentally-strong stocks at lower levels for reasonably handsome returns over the next 12-18 months.
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