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Last Updated : Dec 08, 2015 04:18 PM IST | Source: CNBC-TV18

Most negatives for ITC discounted; bullish on Titan: SocGen

Nitin Mathur, Emerging Markets Consumer Research, Societe Generale, feels United Breweries and United Spirits are expensive, and that the problems in Nepal are a one-off risk for Dabur.

Most negatives for ITC from a regulatory perspective have already been discounted, Nitin Mathur, Emerging Markets Consumer Research, Societe Generale tells CNBC-TV18, adding that adverse regulatory environment is nothing new for the company.

Mathur feels United Breweries and United Spirits are expensive, and that the problems in Nepal are a one-off risk for Dabur.

He is bullish on Titan based on a positive outlook on urban consumption, and says Hindustan Unilever (HUL) is on track regarding its growth plans.

Below is the transcript of Nitin Mathur’s interview with Ekta Batra and Anuj Singhal on CNBC-TV18.

Ekta: What is your sense in terms of the permutations and combinations with regards to ITC? How much does it get impacted from the likely goods and services tax (GST) structure to come out?

A: Like anybody else on the street, we are also waiting for more clarity on the finer details of this to come in. It is a little early to take guesses of what exactly the rate is going to be and how it is going to impact ITC overall. So, we are still waiting for more clarity as we speak.

Anuj: I was talking to N Jayakumar of Prime yesterday and he said that ITC has been in a negative regulatory environment for practically all its life. Every Budget we see increase in excise and it only keeps on adding additional cash flows. Do you think this reaction that we have seen could be a bit too much on the negative side and is presenting a buying opportunity? I mean leave aside the nitty-gritties of rates and all, but purely as a structural call, are you positive on ITC?

A: Negative regulatory environment is not new to ITC. It has been there for a while now and the last four years have been exceptionally bad, so no negative surprises from that front. When you are looking from a long-term perspective, we are building in low double-digit to high single-digit sort of an earnings growth on a discounted cash flow sort of model. So, yes, I think a lot of negatives do seem to be factored in at these levels and if you triangulate these numbers to 12 months forward price-earnings ratio (P/E), ITC is at 20 times forward earnings versus 35 times where the sector is trading right now.

So yes, at a certain level which is right now, I think all the negatives seem to be factored in from a regulatory stand point.

Ekta: Which are the companies that benefit? We saw Asian Paints, which was higher yesterday because of maybe the fall in the indirect taxation, which could come through. But, even soaps and detergents, so will the likes of HUL also benefit?

A: Having said that we would wait for the finer details to come in, one thing that we would like to call out is that GST in the spirits is going to create a level playing ground for all the competitors. So, let us say GST in its own form if it comes, it is a lot of regional competition, a lot of private companies which are getting benefitted currently under no regulations perspective. They are going to come under the ambit of taxation. That is going to create a level playing ground and it is going to be a positive for the whole fast-moving consumer goods (FMCG) ecosystem.

Anuj: What about Titan? That is the other stock where there is a bit of a debate on how it is going to impact. What is your call on Titan?

A: We are buyers of Titan as well. That is not to do with the GST or the tax implications. Our underlying theme which we flagged a couple of months ago as well when I was here is of an urban consumption recovery environment. We saw that in the festive season and as we go further, we are very positive on the urban consumption environment to improve going forward.

Ekta: How did you read the news about Dabur and the juice sales which are impacted because of Nepal? Have you made any earnings per share (EPS) assumption changes already?

A: We have not done that so far. But these are like business risks, which is well-flagged to the analyst community at least. This should not come as a surprise to anybody. These are one-off risks as well. As I said about Nestle as well a few months back that it is bad. It is sad, but these are like business risks.

Anuj: You have a non-consensus sell on United Spirits and even United Breweries. If you could tell our viewers again the rationale for that and your price targets?

A: We are working on pretty sharp sort of price targets on both United Spirits and United Breweries. One is our preference for alcoholic beverage pack, which is lowest in the coverage pack that we cover. So, we are usually negative on companies where there is no operating leverage, where economies of scale do not exist, where vertical integration risk by suppliers is quite high in alcoholic beverages pack fit in all those sort of tick-boxes there. So, looking at the valuation, again, not cheap by any standards, so it is a relative valuation call versus the rewards that can be available to investors.

Ekta: HUL, there was a technical meet yesterday, but anything that you took away from which was qualitative and more fundamental related?

A: Pretty much on track for a sustainable growth. The company has been consistently delivering on this strategy. So, there are no negative or no positive surprises from the HUL analyst meet, I would say.
First Published on Dec 8, 2015 04:18 pm
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