ITC Ltd. share price target

Post the ban on sale of loose cigarettes in Maharashtra, ITC?s stock price has corrected ~10% in the last 7 days. There is a concern among investors that pan-India ban on sale of loose cigarettes is imminent.

Buy at Rs 320.9 and add on dips to Rs. 287-301; Price Target: Rs. 344 in 1 quarter

Background: ITC, with revenues in excess of $7bn, is a market leader in Cigarettes with about 70+% volume share and 85+% value share. Cigarette business is a cash cow accounting for 50% for Sales and ~ 81% of EBIT. To diversify away from cigarettes with a long term perspective, they have other businesses such as FMCG, Hotels, Paperboards, Packaging, Agri-Exports, Branded Apparel & Stationery. ITC also a rural initiative with 6500 `e-choupal's aimed at farmers for procurement,...

ITCs overall revenues increased a mere 0.6% YoY to Rs 92.9bn (below est). Cigarettes reported net sales growth of 3.2% YoY (implied volume decline of ~10%). Key negatives are (1) Cigarettes delivered 6% YoY EBIT growth (vs 8.8% in 3QFY15) (2) Muted sales growth witnessed in Agri (28.8% YoY decline) and Paper (4.6% YoY decline) (3) Hotel business witnessed a significant margin contraction (-654bps YoY) (4) ITC?s EBITDA margin expansion of 22bps YoY (34.9%) was below expectation.

During our recent interaction, ITC?s management appeared cautious on near term cigarette volume and EBIT growth post 13-14% price hike. We recognise that punitive taxation is worse for cigarettes than for bidis (75% of smoke). With cigarettes being sold through 6-7mn outlets across India, implementation of restrictive point-of-sale regulations (such as a loose sale ban) remains challenging.

Background: ITC, with revenues in excess of $7bn, is a market leader in Cigarettes with about 70+% volume share and 85+% value share. Cigarette business is a cash cow accounting for 50% for Sales and ~ 81% of EBIT. To diversify away from cigarettes with a long term perspective, they have other businesses such as FMCG, Hotels, Paperboards, Packaging, Agri-Exports, Branded Apparel & Stationery. ITC also a rural initiative with 6500 `e-choupal's aimed at farmers for...

We note that occasional smokers (smoking one-two cigarettes in 2-3 days and who constitute the bulk of loose cigarettes consumers) may reduce their intake owing to the ban, thereby impacting volumes. However, the quantum of the impact is difficult to be factored into estimates owing to inherent...

Background: ITC, with revenues in excess of $7bn, is a market leader in Cigarettes with about 70+% volume share and 85+% value share. Cigarette business is a cash cow accounting for 50% for Sales and ~ 81% of EBIT. To diversify away from cigarettes with a long term perspective, they have other businesses such as FMCG, Hotels, Paperboards, Packaging, Agri-Exports, Branded Apparel & Stationery. ITC also a rural initiative with 6500 `e-choupal's aimed at farmers...

Background: ITC, w ith revenues in excess of $7bn, is a mar ket leader in Cigarettes w ith about 70+% volume share and 85+% value s hare. Cigarette business is a cash cow accounting for 50% for Sales and ~ 81% of EBIT. To diversify aw ay from cigarettes w ith a long ter m perspective, they have other bus inesses such as FMCG, Hotels, Paperboards, Packaging, Agri- Ex ports, Branded Apparel & Stationery. ITC also a rural initiative w ith 6500 `e-choupal's aimed at...