Hold ITC; target of Rs 307: Edelweiss
Edelweiss’ research report on ITC
Predicting budget outcomes is, more often than not, a futile exercise, generally leading to more misses than hits. Yet, we see higher probability (70%) to Budget 2018 being kinder to ITC as: (i) government’s monthly compensation cess collection (>INR75bn run rate) over July-November 2017, if extrapolated for full year, indicates healthy ~INR675bn kitty versus INR500bn estimate; (ii) government is sharpening focus on tax collection from other tobacco products (including illegal cigarettes); and (iii) historical trend indicates a soft-to-moderate budget post a harsh budget in the preceding year (though FY17 budget was moderate, GST rate was harsh resulting in ~16-17% tax hike in a year). Improving prospects of ITC’s other businesses and the P/E gap between HUL & ITC (at ~50%, multi year) lend valuation comfort. Hence, though we maintain ‘HOLD’, at CMP, risk- reward looks favourable.
With per capita consumption 1/18th of China’s, cigarette opportunity in India remains attractive over the long term. However, with cigarette still contributing ~85% to EBIT, reliance on regulated business continues to remain high. Hence, we maintain ‘HOLD/SP’ and value ITC on SOTP on FY20E to arrive at TP of INR307. At CMP, stock is trading at 25.9x FY19E EPS.
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