ITC: A crash that can be cashed

Anticipating excise increase in the Budget, the stock has corrected 12 per cent off its highs.

For over a decade, the markets have been hammering ITC’s shares in the run-up to the Budget, in anticipation of an increase in excise duty on cigerettes. The stock has corrected 12 per cent off its highs.

This year is no different, even though the company undertook a five-six per cent pre-emptive price increase in January. For FY05-10, the company’s cigarette earnings before interest and tax (Ebit) have grown at a cumulative aggregate growth rate (CAGR) of 16.9 per cent, as against its volume CAGR of 3.7 per cent. Even after the 22 per cent price increase in FY08 post VAT, it lost 0.9 per cent volumes.

Again in FY09, despite vacating the non-filter (which used to contribute 20 per cent of volumes) space, the company lost only three per cent volumes. With cigarettes contributing 67 per cent to total revenues, the company is not at risk from any imminent increase in excise rate this Budget.

Apart from its core cigarette business, the company’s paper business saw sustained improvement in profitability, while its agri-business is holding on to 10-12 per cent Ebit margins. The personal care business, too, is expected to break-even at the Ebit level by FY13. The consumer space is currently plagued by increased competition and rising input costs. However, in case of ITC, raw material costs constitute only 10 per cent of its cigarette business, which accounts for 81 per cent of its consolidated Ebit. This, combined with its pricing power, makes it immune to any inflation in raw material costs.

A dominant marketshare of 81 per cent in an industry which is not allowed to advertise is surely good news for investors, if not consumers. Not surprising then that the company’s chairman, YC ‘Yogi’ Deveshwar, is betting on his own company’s stock.