WOW - Man Financial - ITC

Broking House - Refco-Sify Securities
Recommendation - Neutral
VAT to impact margins by 11-12% in no hike scenario...
In its report dated 10th Jan, 2007 Man Financial (Man) upgrades ITC to Neutral at a CMP of Rs. 163 with a 12 month target price of Rs.185.

Based on Man''s various probabilistic scenarios, without offsetting price hike the expected impact of VAT on ITC''s earnings could be 11%-12% but the actual impact would depend upon the price hike that ITC can take to offset this.

Man states that the expectations treadmill has also slowed down with better appreciation of increasing challenges in agri-retailing and inflationary concerns on NCFMCG.

Man points out that after a significant re-reacting over the past couple of years, valuation stretch has reduced significantly. 1-year forward PE and EV/EBITA have declined by 30% and 32%, respectively from their highs in May ''06.

Man believes that after the recent price under performance, the stock is trading at closer to fair valuations. It trades at 18.6XFY08E one year forward EPS. According to Man''s expectations 20.2% EPS CAGR for FY07E-FY09E, the stock is trading at a PEG of 1.1x. Man believes that this reflects the risks and rewards of the Business composition quite fairly and initiates a coverage with Neutral rating.

Thanks HK