R K Global is bullish on ITC and has recommended buy rating on the stock with a target of Rs 224 in its September 22, 2011 research report.
“ITC, the Govt. of West Bengal has brought tobacco related products like cigarettes, chewing tobacco and cigar under Schedule D** in August FY’12. VAT on these products was increased to ~20% effective from Sep’1 FY’12 from earlier ~13.5%. However, the state could further schedule a higher VAT level up-to ~30% by FY’13E if it doesn’t meets its VAT collection targets. In the midst of Q1FY’12, Tamil Nadu also increased the VAT on cigarette products to ~20% from ~12.5% earlier.”
“West Bengal and Tamil Nadu are among the key revenue contributors to the company’s cigarette business with a contribution of approximately ~8.3% and ~11% respectively. The other key contributors to the company’s cigarette business are Andhra Pradesh (~13%), Kerala (~12%), Maharashtra (~9%) and Karnataka (~9%) who had not hiked or just modestly hiked the VAT rate in their respective state budgets. Given WB’s & TN’s VAT effect on ITC’s FMCG-cigarette business revenue, we don’t expect any material impact on the company’s earnings, considering the ~6.8% average price increase in the cigarette portfolio. Recently the company hiked the price of its Classic brand of cigarettes by 10%, Gold Flake King (~4%) & Wills Navy Cut (~6.5%). So, in any way, the company has hiked prices to sub-side the VAT. In-fact, we have factored a ~2.5% rise in FY’12E FMCG-cigarette revenue. On the other hand, ITC opened its first retail store selling premium cigar brand 'Armenteros' in Delhi as part of its plans to strengthen its presence in the premium tobacco segment. ITC’s cigar category is growing at a rate of ~20% PA in the country on the back of increasing disposable incomes and exposure to global lifestyles.”
“Hence we evenly maintain our earnings estimates at ~19.6 (earlier ~18.5) over FY’12-13E & NPAT at ~20% (earlier ~19%). At CMP the stock trades at a P/E of ~21.1x of its FY’13E EPS of Rs 9.0 & P/BV of ~7x of its FY’13E BVPS of Rs 27. We reiterate our BUY recommendation on the stock with a revised price target of Rs 224, having a potential upside of ~15.1% factored over FY’13E P/E of ~24.8x of its EPS of Rs 9.0,” says R K Global research report.
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