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Buy ITC – Solid Results – JP Morgan and Citi

July 27, 2007

JP Morgan and Citigroup have upgraded ITC to a BUY previously from hold with a price target of Rs 195.

After 40% underperformance over the last 12 months, risk-reward looks favorable. Investors are focusing too much on cigarette volumes; we estimate that even if volumes were to decline by 5%, cigarette EBIT would increase 8% in FY08. ITC’s price hikes are heavily loaded in favor of its mid segment brands (~65% of volumes)

Target price increase to Rs195 from Rs130 reflects 1) rolling forward target P/E from FY08E to FY09E, given that we are approaching mid FY08E and expect valuations to start reflecting FY09E; 2) increase target multiple from 15x to 20x, toward the higher end of historical trading bands.

ITC Q1 Profit stands at Rs 783 crore up from Rs 652 crore a year ago [Up 20.2%]. Sales up from Rs 2850 crore to Rs 3325 crore.

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