ITC has increased the price of its Gold Flake brands of cigarettes (Cool Mist, Kings and Lights) by 10% each to Rs44 for a pack of ten cigarettes.
These Gold Flake brands of cigarettes (84 mm) fall under the King category, which accounts for nearly 10% of the total cigarette volume of the company.
We expect ITC to follow this price increase with a hike in the prices of the Long (71-75mm) and Regular (< 70mm) categories of filter cigarettes in the near future. In our FY2010 estimates we had already factored in an overall price hike of 6% in the company’s cigarette business.
We see the latest price hike in a positive light, as it would protect the company against any increase in the excise duty on cigarettes in the upcoming budget.
Besides boosting margins in the short term, the move would also cushion the impact of a possible steeper price hike that the company might have to undertake in the event of an excise duty hike.
Despite the government’s efforts to curb the consumption of tobacco and tobacco products, historically the company’s cigarette volumes have been relatively inelastic to price increases.
For Q4FY2009, we expect ITC to register a 10.8% year-on-year(y-o-y) growth in its net sales, driven by a good growth in the cigarette business on the back of price increases and a better revenue mix owing to the upgradation of smokers from non-filter cigarettes to filter cigarettes.
We expect the operating profit margin (OPM) to improve by 106 basis points in Q4FY2009, mainly on account of a 113-basis-point decline in the other expenses as a percentage of sales.
However, the key things to watch for in the fourth quarter results are the revenue growth and the loss in the non-cigarette fast moving consumer goods (FMCG) business.
At the current market price the stock trades at 21.2x its FY2009E earnings of Rs8.8 and 18.2x its FY2010E earnings of Rs10.3. We maintain our BUY recommendation on the stock with the price target of Rs206.