Stock Recommendation: 1

ITC
Recommendation: Buy
Price target: Rs247
Current market price: Rs193

Proposed excise hike to dent cigarette volumes

Key points

• The steep hike in the excise duty on non-filter cigarettes will have a negative impact on non-filter cigarette volumes of the cigarette industry.
• The impact of the excise duty hike will be marginal on ITC, as only 20% of the company's cigarette sales are generated from non-filter cigarettes. The decline in the non-filter cigarette volume will be partially offset by a rise in the filter cigarette volume. We have revised the FY2009 cigarette volume estimates downward from 5% to 2.8%.
• Consequently, we are downgrading the FY2009 earnings per share (EPS) estimate by 0.9% to Rs9.80.

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SECTOR UPDATE

Automobiles

Two-wheeler sales continue to decline
Sales of two-wheelers continue to decline due to the prevailing tight financing situation. On the other hand, sales of four-wheelers, mainly cars, saw a marginal growth last month. February is generally a slow month for the automobile sector because sales get postponed in anticipation of a price reduction in the Union Budget. Consequently, sales of Maruti Udyog grew by only 0.4% in the domestic market. With the reduction in the excise duty on two-wheelers and small cars announced in the budget for FY2009 and the reduction in prices announced by the automobile companies, sales of automobiles are expected to revive from March onwards