IIFL is bullish on ITC and has recommended buy rating on the stock with a target of Rs 486 in its August 27, 2014 research report.
IIFL`s research report on ITC
“ITC’s cigarette business continues to display resilience with stable earnings growth and healthy margin expansion despite heavy tax burden and regulatory restrictions. In its FY15 budget, Government increased duties on the 64mm cigarette segment by 72%, reducing its attractiveness vs. 69mm segment. Excise duties on other segments were increased by 11‐20% (11% in longs, 17% in regular, ~20% in kings). The weighted average impact on ITC is expected to be ~20% (annualised) increase in tax. It is steeper than expected but is significantly lower than the fears of doubling the excise duty. We believe ITC will be able to manage it in terms of delivering EPS growth as micro filter cigarettes (64mm) account for mere ~10% of ITC’s total cigarette volumes. However, this being the third consecutive year of ~20% increase, cigarette volumes could decline by ~4% yoy in FY15. On the other hand, most states have not increased VAT this year, which would boost bottom line.”
“ITC remains one of our high conviction buys in the sector given the strong resilience in its core cigarette business. The stock is trading at 20x FY17E EPS of Rs17.4, a steep discount to large caps like HUL and Nestle. The current valuations ignore positives such as ITC’s dominant position in the cigarettes business and the consistent strong performance of its other‐FMCG business. We remain confident of ITC’s pricing power to pass on any tax or duty hike to consumers and deliver mid‐teen EBIT growth in cigarettes business. Further, strong cigarette revenue growth with healthy EBIT margins, increasing profitability in other‐FMCG business and steady ~16% CAGR in earnings are triggers to maintain buying interest. Buy ITC with a target of Rs 486,” says IIFL research report.
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