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Spark Capital - ITC Excise hike Implication: Pricing power to combat duty increase, Maintain BUY




Spark Capital Advisors(India) Private Limited


28 Feb 2013





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ITC Excise hike Implication: Pricing power to combat duty increase, Maintain BUY As part of the Union Budget for FY14 the finance minister has proposed an increase of 18% in the specific excise duty on cigarettes. This is a second consecutive year of steep increase in excise duty as ~21% increase was imposed in FY13. While the sharp increase in taxation (both excise and VAT) has resulted in only marginal increase in volumes over the past 6 yrs, ITC has attained a consistent annual earning growth from the segment of ~18% led by price hikes and better revenue mix (premiumisation). Our calculations suggest that to pass on the additional tax burden and maintain the earnings growth rate of ~18% for FY14 ITC shall need to increase price of cigarettes by ~13-14%. We expect cigarette sales volumes to decline by ~2% yoy for the company in FY14 as a result of sharp price increase necessitated for second consecutive year. Valuations and View: While hefty increase in tax on cigarettes does not augur well, the strong pricing power of ITC in the segment should ensure it maintaining earnings growth rate of ~20%. Assuming a pass on of the tax increase our earnings estimates remain largely unchanged. With high comfort on consistent strong earnings growth delivery we maintain ITC as a preferred pick in FMCG sector. We maintain BUY recommendation on the stock with a SOTP based price target of Rs.335 at which it shall discount FY14E and FY15E earnings by 29x and 23.8x respectively.

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