ITC
Recommendation: Buy
Price target: Rs340
Current market price: Rs315
Price hikes in cigarette basket inevitable
Key points
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ITC hikes cigarette prices: After a sharp increase in taxes on cigarettes in the Union Budget for 2013-14 as well as in the budgets of the key states, ITC has increased the prices of its key cigarette brands by 11-20% (as seen in the table below). The company has increased the price of Gold Flake-regular size cigarette (the key contributor to the company's cigarette sales volume) by around 15% to Rs55 for a pack of 10 cigarettes. The weighted average price increase currently stands at about 14%. The price increase was in line with our as well the Street's expectation. We had stated in our Stock Update dated March 21, 2013 that ITC would have to implement a price increase of over 15% to maintain its PBIT margin in the 31-32% range. We expect additional price hike of around 3-4% in the coming months.
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Cigarette sales volume to remain subdued in FY2014: A price increase of over 15% for the second consecutive year will definitely have an impact on the cigarette sales volume of ITC. We have factored in around 1.0-1.5% decline in the sales volume of ITC's cigarette business for FY2014. We believe ITC would strongly promote the newly launched cigarettes in the 65mm category and launch some of its prominent brands under this category.
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Outlook and valuation: We expect ITC to increase the prices of some of the other key brands in the coming months. The revenue growth of ITC's cigarette business would be led by price hikes, as cigarette sales volume are expected to remain subdued in FY2014. Overall, we expect the revenues of the cigarette business to grow in mid teens. We also expect ITC's profitability to sustain above 30% in FY2014.
At the current market price the stock trades at 33.0x its FY2013E earnings per share (EPS) of Rs9.6, 27.4x FY2014E EPS of Rs11.5 and 23.2x FY2015E EPS of Rs13.6. We maintain our Buy recommendation on the stock with a price target of Rs340.
Gayatri Projects
Recommendation: Buy
Price target: Rs275
Current market price: Rs76
Positive development on power projects augurs well
Some of the recent news flow and developments also augurs well for the company and provide better visibility and confidence.
Thermal Powertech Corporation India (TPCIL; GPL 51%, Sembcorp 49%)
Signing of PPA for 500MW out of 1,320MW power plant
GPL's subsidiary TPCIL has executed a power purchase agreement (PPA) with Power Distribution Companies of Andhra Pradesh, wholly owned by the government of Andhra Pradesh, for supply of 500MW power to the Central, Eastern, Southern and Northern Power Distribution Companies of Andhra Pradesh for 25 years.
We believe the development is in line with the company's ongoing efforts to sign the PPA agreement for a 1,320MW capacity power project and is a major positive. Further, signing of the PPA with other state governments will help the company in getting timely loan disbursals from banks.
NCC Power Projects (GPL 45%, NCC 55%)
Potential entry of strong partner in the power project: Sembcorp and Genting reported to be interested buyers
Sembcorp, Singaporean utility major, as well as Malaysian Genting have reportedly conducted due diligence to buy a power plant owned by Nagarjuna Construction Company (NCC; 55% stake) and GPL (45% stake). The Rs7,047 crore coal-based project with a capacity of 1,320MW is located in Krishnapatnam, Andhra Pradesh. The extent of interest that NCC and GPL are willing to offload is not known, but foreign utilities might be looking at a majority stake, which will be offloaded by NCC, while Gayatri will stay on the project.
Outlook
GPL through its wholly owned subsidiary Gayatri Energy Ventures is already executing a 1,320MW joint venture power project with Sembcorp at Krishnapatnam in Andhra Pradesh. The said project is executed at a total estimated outlay of Rs6,869 crore funded through Rs5,151 crore of debt and Rs1,718 crore of equity. Sembcorp had bought 49% stake in the project at Rs1,042 crore at 24% premium to the book value. Additionally, Sembcorp has provided Rs250 crore structured loan (optionally convertible preference shares). We believe if Sembcorp and Genting do become partners of GPL after NCC's stake acquisition than it will mitigate the execution risk of the project to a considerable extent. The benefits of a synergy between Sembcorp and GPL would get further strengthened by partnering in other major power projects in the same state. The funding pressure of the two large power projects would ease which in turn would be beneficial for GPL in improving its balance sheet strength. Further, an exit strategy may arise for GPL from the power projects at a lucrative valuation as witnessed in the past.
We have valued GPL's stake in the two power projects cumulatively at Rs98 per share (NCC Power Project [Rs54] + TPCIL [Rs44]) at 50% of the book value. We have a Buy rating on the stock with a price target of Rs275.
MUTUAL GAINS
Debt Mutual Fund Picks
Bond / Debt market round up
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Bond yields fell in the first week of March on hopes that the central bank will cut interest rates in its mid-quarter monetary policy review. Improving cash conditions, as seen by a sharp drop in banks' borrowings from the central bank, also supported debt markets initially. However, later yields rose to their highest level in two-and-a-half months on better-than-expected Index of Industrial Production (IIP) data and higher Consumer Price Inflation (CPI) numbers. It rose further when the Reserve Bank of India (RBI) in its monetary policy review said there is limited room for further rate cuts. Political uncertainty in the country also made sentiments weak. Moreover, the central bank's cautious outlook overshadowed its planned debt purchases of Rs. 10,000 crore via Open Market Operations (OMO), which was largely anticipated, given the tight liquidity condition. In the last week of the month, yields started rising again after a key ally of the ruling UPA pulled out of the coalition Government.
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The 10-year benchmark bond ended up 8 basis points (bps) to close at 7.95%, compared to the previous month's close of 7.87%.
Bond / Debt Outlook
