We retain our ‘buy’ rating on ITC with a target price of R392 per share. We value the company using a sum-of-the-parts valuation methodology. We value the core cigarettes business at R282 per share based on a P/E multiple of 26x on FY15e earnings. Other SoTP valuations include hotels business at 22x, which gives a value of R5 per share; the paper Business EV/ebit of 8x, which gives a value of R13 per share. New ventures at 4x sales, which gives a value of R71 per share; the Agri Business at 1x sales, which gives a value of R8 per share; and the cash and liquid assets of R13 per share.
Media reports said Union health minister Harsh Vardhan had sought a tax increase on cigarettes of all lengths by R2-3.5 per stick. We believe the measure, if implemented, will be a significant negative for ITC in the near term. Excise duty increase has been an average 15% since FY10, which the company has passed on to consumers.
ITC has been consistent in its approach in dealing with excise duty increase over the past five years. The company has consistently passed on the increase to consumers, which has meant that the cigarette business ebit has continued to remain robust and deliver mid-teens growth over the period.
Nomura
