Buy ITC - Pricing Power to sustain growth - Motilal Oswal

ITC: Rajasthan doubles Cigarette VAT to 40%; incremental VAT increase 100bp so far; pricing power to sustain growth; Buy

5 states, namely Bihar, Gujarat, Rajasthan, Himachal Pradesh and Jammu and Kashmir have increased VAT on tobacco products in their respective budgets.

The 5 states are relatively smaller states for ITC and cumulatively contribute ~12% of ITC’s cigarette sales in value terms.

ITC is comfortably placed as it had increased cigarette prices by ~4.2% in January and there has not been any increase in excise in Union Budget.

We estimate that a ~1.1% price increase would be sufficient to cover the incremental increase in VAT. Further price increases by the company is likely in FY12.

We note that in FY10, in spite of a 200bp increase in VAT on cigarettes, ITC recorded a 7.2% volume growth and 18% EBIT growth in the cigarette division.

We estimate 19.4% PAT CAGR for ITC over FY11-13 backed by 17.5% EBIT CAGR in cigarettes and 23% EBIT CAGR in the non-cigarette business. The stock trades at 22.2x FY12 and 18.9x FY13 EPS of Rs7.8 and Rs9.2. Maintain Buy with SOTP based target price of Rs200, a 16.5% upside.

Source : Equity Bulls

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