SUSPENSION OF NON FILTER CIGARETTES

The company has suspended the production of non-filtered cigarettes owing to the excise duty hike proposed on non-filter cigarettes in the 2008-09 Union Budget. The company has also not increased the prices of the filter cigarettes in anticipation of a shift of a large population of smokers from the non-filter cigarettes to the filter cigarettes. By cutting down on the availability of non-filter cigarettes ITC would also be able to increase its volumes in the filter cigarettes. Filter cigarette accounts for 90% of ITC’s cigarette sales value.

Industry players in the nonfilter cigarette category have sought a review of the excise duty hike, as at the proposed higher excise rates production and sale of low-priced non-filter cigarettes is not feasible.

ITC continues to witness growth in its premium end brands despite its price hikes in FY08, thus indicating the pricing power enjoyed by its brands.

Road Ahead with other business; FMCG, AGRI, RETAIL

From ITC's total sales revenues, FMCG contributes 8%.  The sector is providing immense opportunities for the companies with untapped rural market, rising income levels, large domestic market, export potential and higher consumer goods spending. The availability of key raw materials, cheaper labor costs and presence across the entire value chain provides competitive advantage for the sector. ITC's dominance in the filter cigarette segment and multiple revenue drivers will help it deliver a strong performance going forward.

Having tasted success with its Choupal Sagar hypermarket concept in rural areas, the company plans to explore possibilities in tier-II and tier-III cities. The company is planning to open 6 to 7 hyper markets in smaller cities across the country which are going to be operational by next financial year.     

The company is planning to expand its retail footprint further by setting up more Wills Lifestyle, John Players and Miss Players stores across the country ITC also intends to increase the number of Wills Lifestyle stores from 250 to 400 by the end of 2008 – 09 thereby expanding all through the country and magnifying the potential for developing huge brand awareness among the consumers. 

SECTOR OUTLOOK

The Indian FMCG sector is the fourth largest sector in the economy with well – established distribution network, intense competition between the organized and unorganized segments and low operational cost characterizing the sector. The sector is providing immense opportunities for the companies with untapped rural market, rising income levels, large domestic market, export potential and higher consumer goods spending. The availability of key raw materials, cheaper labor costs and presence across the entire value chain provides competitive advantage for the sector. The exclusion of tea & coffee from excise duty and reduction in excise duty of packaging paper in budget 2008 – 09 will benefit the company like ITC, HUL, Tata tea, Nestle etc. 

The company’s balancesheet is strong as it has consistently given a RONW of around 25% over the last five years and its ROCE has been in the range of 30%-40%. If the company makes an EPS of Rs 10.49 and Rs 13.59 in FY09 andFY10 it trades at a PE of 18 times it FY09E and 14 times its FY10E.

-Rahul Kundnani