Macquarie maintains ‘Outperform’ rating on ITC Ltd; target price Rs 304

Over the weekend, ITC made price hikes in Gold Flake Regular and Premium (69mm) and Navy Cut (74mm) brands. The price for Gold Flake (69mm) has been increased to Rs 90/pack of 10 cigarettes (vs Rs 79 earlier) and for Navy Cut the price has been increased to Rs 89/pack of 10 cigarettes (vs Rs 78 earlier). We had highlighted earlier in our channel check note that some of the channel partners were anticipating the price hike in these brands. We maintain Outperform with a TP of Rs 304.

FY17 price hike in-line with our estimates: For both the brands (Gold Flake Regular and Navy Cut), the price hike is 14%. Based on our channel checks, we are also expecting a similar price hike in Flake premium (69mm) brand. These three brands contribute 30% of ITC’s total cigarette volume. The weighted average price hike for the total portfolio (month adjusted) is 5.5% in FY17. This is in line with our price hike assumptions for FY17.

Double-digit cigarette EBIT growth to return in FY17: 1HFY17 cigarette EBIT growth was 8.2%, and we believe with the recent price hike there is a strong chance of cigarette EBIT moving towards double-digit growth in FY17. The price hikes impact our cigarette EBIT growth by 2.5-3.0% for FY17.

In anticipation of a price hike, some participants in the channel started hoarding inventory, which we believe could boost volume in 3Q17. Further, our channel checks suggest cigarette sales have normalised post demonetisation since the last week of November.

ITC Limited