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Brokerages Underweight on ITC

May 26, 2008

Though the revenue growth was good in this quarter, operating margins for the company were hit due to higher investments in the newer businesses. Going forward the growth in the cigarette business of the company will be severely impacted due to the recent changes in the excise duty structure in the Union budget. However, there might be some near-term strength due to migration of consumers from unfiltered to the filtered segment which would result in the company reporting strong numbers in the next few quarters.

Foods portfolio in the non tobacco FMCG segment has grown 40% during the quarter. Growth in other non tobacco FMCG businesses has slowed down. Non tobacco FMCG excluding snack foods and HPC has broken even in Q4F08. Snack foods expected to break even during the next 4 quarters. Agri business profitability has been driven by Soya and leaf tobacco exports. Although revenue growth is likely to be flat margins could improve in F09. New paper mill was commissioned in Q1F09. This backward integration is likely to witness margin expansion in F09.

Consensus EPS Estimate for Fy09 is Rs 9.45 Morgan Stanley, Lehman Brothers, HSBC Equity Research are all underweight on the stock.

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