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Merill Lynch Neutral on ITC

September 28, 2007

ITC’s cigarette performance in Sept Quarter will not live up to market’s expectations. ITC’s volumes in Sept Quarter are expected to be down 3-4% y-o-y and volumes are lower than June Quarter as the later had the hit of higher prices for only 2 months. Secondly, it bears the full brunt of Uttar Pradesh tax of 32%. UP accounts for 6% of ITC’s volumes and has not implemented VAT of 12.5%.

ITC’s recent shampoo launch marks its entry in the household and personal care (HPC) category. The brand, Fiamma Di Wills has been launched in six SKUs and is priced in between HUL’s Sunsilk and Clinic All Clear. We believe next in the pipeline are shampoo sachets and soaps. These events imply that ITC’s FMCG losses (5% of EBIT) are unlikely to decline in the near future.

ITC is expected to report a fully diluted EPS of Rs 8.27 for FY08 and Rs 9.36 for FY09.

DalalStreet.Biz Recommendation:
We recommend our reader / investors to switch out of ITC into other growth stock.

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