Buy ITC with target of Rs 200: DSP Merrill Lynch

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Buy ITC with target of Rs 200: DSP Merrill Lynch

DSP Merrill Lynch is bullish on ITC and has maintained buy rating with target of Rs 200 on the stock.

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DSP Merrill Lynch is bullish on ITC  and has maintained buy rating with target of Rs 200 on the stock.

DSP Merrill Lynch reports on ITC:

2Q results disappoint slightly:

"ITC's 2Q net profit grew 18.7% to Rs 6.8billion, 4% lower than our expectations, owing primarily to lower EBIT margins across most of the businesses. Total turnover grew 26%, led by 14% growth in cigarettes and 50% growth in noncigarettes. Total EBIT grew 19%, led by cigarette EBIT growth of 15% and noncigarette growth of 44%."

Cigarettes - Steady so far, headwinds ahead:

"We estimate 2Q vol. gr. of 8-9%, in line with our expectations. However margin expansion of only 30 bp is disappointing. For 1H, margin gain has been 80bp, in line with historic trends. Over the next few months, we expect stock sentiment to be hit by overhang of excise and VAT levy in Feb 2007. We believe tax increases of up to 10% will not have any significant detrimental impact on ITC's cigarette business." 

Non-cigarettes - Lowest margin Agri business outperforms:

"Key highlights in the non-cigarette businesses - FMCG losses increased YoY on account of large promotional events; going forward losses likely to fall sequentially in 3Q and 4Q; Agri turnover grew 87% and EBIT grew 49%, led largely by leaf tobacco and commodity exports, 2H is generally leaner for agri; hotels and paper performed largely in line with our expectations."

Stock View - Buy but limited triggers near term:

"We believe ITC is an excellent stock to play the long term consumption growth story in India, especially in rural India. But near term we expect the stock to consolidate given concerns regarding cigarette tax increase in Feb-2007, increasing advertising restrictions on cigarettes, possibility of large greenfield capex in the paper business and gestation costs for new FMCG businesses. Maintain buy. Target of Rs 200."