ITC’s cigarette volumes is expected to be down by 4.4% in FY08, previous forecast a 6.5% fall. With strength in consumer spending, cigarette volumes held up well in Q1, despite imposition of a 12.5% VAT rate and a 33.5% trade tax in UP. Expect volumes to stabilise in Q2 and to recover in Q3. ITC’s multiple price points in its cigarette portfolio has allowed the business to move the consumer across segments rather than lose volumes. Filter cigarettes have held volumes better than the non-filter variety. This has improved the revenue mix.
ITC’s FMCG business is driving strong growth in the non-tobacco segments. Losses have stabilised and look set to decline. The hotel and paperboard businesses are recording strong growth and are expanding capacity.
Raised FY08 EPS forecast to Rs8.4 (+9%), and FY09E EPS to Rs9.9 (+13%). The increase reflects a rebound in cigarette volumes. New price target is benchmarked at 20x FY09E earnings, the mid-point of ITC’s valuation band.