Espirito Santo flags volume growth concerns at ITC

Moneycontrol Bureau

Since the Union Budget announced in March this year, ITC has raised cigarette prices by weighted average of 12%. Investment bank Espirito Santo feels, while this will help offset the excise duty hike, it could hurt India's largest cigarette maker's volumes by at least 5%.

"We believe suggestions of inelasticity of demand are overstated and see risk to FY13 volumes following sharp price increases. We believe FY13 volumes could decline by more than 5% as ITC decides to push through price increases to offset the increase in duties. Visibility on FY13 is opaque until we see the impact on volumes following these levels of price increases," Nitin Mathur, analyst at the Portugese investment bank wrote on Tuesday.

The frequent price hikes may have helped ITC boost margins, but Mathur says its rivals like VST Industries and Godfrey Phillips India are growing faster.

ITC's volumes grew 6% last financial year, and Mathur feels its too early to determine how much demand destruction there will be be this year following the price hikes taken to offset 20% duty increase.

The cigarettes business contributes to nearly half of ITC's total revenue. Last year, the company reported gross revenue of Rs 36,617.5 crore. Gross  cigarettes revenue was Rs 23,232 crore.

Espirito Santo has advised investors should "sell" ITC shares. It has a fair value of Rs 200 on the stock.

Many other analysts, however, remain bullish on the stock.

Sharekhan analyst Kaustubh Pawaskar, for instance, has a "buy" rating on ITC with a Rs 255 price target.

He says, while there will be some impact of price hikes on cigarette volumes, it will only be short-term. So while there is likely to be some margin "softening" in the first half of this year, he's expecting improvement from third quarter onwards.

Overall, Pawaskar is expecting flattish volume growth in cigarettes this year. But the price hikes will also help it maintain double growth in gross revenues and PBIT (profit before interest, taxes) margins for ITC.

ITC shares were up 2.5% at Rs 249.40 on NSE on Tuesday. The stock is up near 21% since Dec-end.

Nachiket Kelkar
nachiket.kelkar@moneycontrol.com