ITC: Not hurt by the Budget

The ITC stock has jumped 10 per cent in two trading sessions with the much-awaited hike in excise duties -- of around 5 per cent -- not coming through in the union Budget for 2009-10.

Since the start of the year the stock had gained just 12 per cent underperforming the BSE FMCG Index which moved up by 15 per cent. In fact, the stock lost 4 per cent in a session when the value-added tax on cigarettes in Maharashtra was increased to 20 per cent.

The feeling was that the higher levy would prompt the company to increase prices in the process hurting volumes. But the unchanged central excise duty, analysts say, outweighs the VAT increases in Maharashtra and Delhi.

As a result, estimates for the current year have been upped with expectations that the company could grow its top line by as much as 13-14 per cent driven by a 6-7 per cent rise in volumes.

So revenues could come in at around Rs 17,500 crore (Rs 175 billion), while net profits are expected to grow at a higher 17-19 per cent driven by an expansion in operating margins of about 100 basis points, thanks mainly to better profitability in the cigarettes business.

Hotels are expected to do better this year on a weaker base while the FMCG business is expected to report lower losses. At a price-earnings multiple of just under 21 times estimated 2009-10 earnings and 18 times estimated 2010-11earnings, the ITC stock trades below its three-year average P/E of 21 times.

It's unlikely the stock will trade at much higher multiples because the regulatory environment for cigarettes remains unfavourable -- it's possible other states too could hike VAT to 20 per cent. To maintain margins, ITC would, therefore, need to hike prices which could hurt volumes-in the last couple of years volumes have barely grown.

Cigarettes may fetch just around 40 per cent of ITC's sales but they bring in close to 85 per cent of the company's profit before interest and tax.

The non-cigarette FMCG businesses, it would appear, will continue to be a bit of a drag on the bottom line for some more time.