Buy ITC, target Rs 382: HDFC Securities
Buy ITC Ltd. at a price target of Rs 382.
The current market price of ITC is Rs 299.65.
Time period given by the financial firm is one year when ITC price can reach the defined target.
View of HDFC Securities on ITC:
Time and time again the concern on ITC has been around tax hikes and its impact on the cigarette business.
All challenges aside, the company has been able to deliver nearly 10 per cent cigarette revenue CAGR in the last 10 years (in comparison to FMCG sector growing by 13 per cent) despite muted volume growth.
This reflects ITC’s pricing power and leadership position. With this note we tried to answer critics who believe that cigarette industry volumes have ‘peaked’ in India.
To gain some perspective, we compared Indian cigarette market with global market.
India is a ‘unique’ market wherein 85 per cent tobacco consumption is from non-cigarette products vs. 10 per cent globally.
Interestingly, tobacco consumers are more prevalent in India (30 per cent population >15yrs) vs. globally (nearly 21 per cent >15yrs).
While, only 4 per cent of India’s population (>15yrs) consume cigarettes. As a result, India contributes a mere 2 per cent of global cigarette volumes (5,500bn sticks) despite housing 2nd largest smoking population in the world (skewed towards bidis).
As India aggressively followed global curbing measures on cigarette smoking (despite its low share in tobacco), legal volumes declined by nearly 20 per cent from its peak of FY12.
During this period, illegal cigarette market in India (25 per cent now vs. 16 per cent in 2010) thrived on this arbitrage opportunity and surpassed global illegal share of 10 per cent.
In the backdrop of these demographics, we believe that cigarette volumes will recover hereon driven by (1) Improving consumer sentiments, (2) Recovery in rural consumption (upgrade from bidi to mini cig.) which forms 2/3rd volume share, (3) Improving standard of living, (4) Stable tax environment and (5) Curbing illicit trade (driven by WHO treaty).
Our thesis is based on the assumption that tax hikes (price hike not more than general inflation) will not be as steep as witnessed in the last 5 years. In such a scenario, ITC can deliver mid single digit volume growth during FY18-21E.
Non-cigarette business is in a sweet spot:
ITC in its packaged food portfolio has successfully built power brands like Aashirvaad, Sunfeast and Bingo. Its strength lies in backward integration, large appetite to spend on brand investments and pan-India distribution. With improving consumption dynamics, ITC can scale its existing portfolio (a 13x opportunity) through several brand extensions and enter in newer categories. We believe ITC’s strategy will also be around profitable growth after achieving a meaningful scale. Other non-cigarette segments (Hotels, Paper and Agri) are also on the verge of posting improved performance. We expect overall non-cigarette business to grow by 14 per cent CAGR during FY18-21E.
At 27x FY20E EPS, ITC trades at an unfair discount of nearly 30 per cent to the sector. We roll forward to Sep-20E EPS, valuing at 32x with target price of Rs 382 (earlier Rs 367). Maintain BUY.