Edelweiss recommends ACCUMULATE on ITC

ITCs Q4FY07 results were above expectations on the back of 14.3% Y-o-Y growth in cigarettes due to pre-price hike hoarding. Margins of cigarettes, FMCG-Others, and hotels improved by 37bps, 415bps, and 167bps, respectively. The key highlight s of this quarter were: (1) net sales grew by 24.5% Y-o-Y to INR 34,663 mn; (2) gross margins declined by 23bps Y-o-Y due to increased proportion of the lower margin FMCG-Others and agri business; (3) EBITDA margins declined by 198bps Y-o-Y due to higher advertising expenditure; and (4) PAT before exceptional items grew 14.7% Y-o-Y to INR 6,507 mn. We believe ITC has effected higher-than-required price hikes to make up for the impact of VAT and rise in excise duties. This is likely to shield the company from any decline in realizations. We are increasing our estimate for realization growth from the earlier -8% to 0%.

Further, paper business margins are expected to improve as new pulp capacity comes on stream by Q4FY08, the hotel business is expected to maintain the high margins driven by ARR hikes, and the agri business is expected to scale up this year with the launch of 20-25 Choupal Sagars. At CMP of INR 167, the stock trades at P/E of 20.8x and 17.4x and EV/EBITDA of 14.8x and 11.4 x on FY08E and FY09E, respectively. There is a likely upside from roll back of entry tax levied by states if the ruling goes in ITC's favour. We continue to maintain our ACCUMULATE recommendation. Positive outlook on all segments Cigarettes: As per our estimates, the higher-than-required price hikes effected to make up for the VAT impact and rise in excise duties are likely to shield the company's realizations from declining.Further, with only 30% of ITC's volumes come from low-end brands, we do not expect realizations to decline. We are increasing the estimate for rise in realization from the earlier -8% to 0%.