Hearty puff
ITC’s stock price has yo-yoed ever
since reports of the Unit Trust of India’s intention to enter into a negotiated deal
for its 12 per cent stake in the company. The news has done a world of good for the ITC
stock. At current levels, it is up some 15 per cent over its lows as of end-May. But now
there are other positive developments in the company that will sustain the stock levels.
Take, for instance, the expected hike in
the prices of Gold Flake Premium (69mm) by 8.6 per cent effective September 1, 2002. The
Gold Flake brand is estimated to contribute close to 25 per cent of cigarette sales, and
most of this comes from the 69mm category. Analysts are hopeful that the current price
hike will not impact volumes, and would hence result in increased margins and profit for
the company. Less than six months ago, in April, the company had hiked prices of some of
its brands including Gold Flake in order to offset the additional taxes levied by various
state governments.
Analysts point out that this price hike in
April was absorbed and did not impact volumes, as is evident from ITC’s 4.7 per cent
volume growth (against 3.5 per cent for the industry) in the June quarter. Moreover, the
Gold Flake price hike is on the back of increased prices for premium smuggled cigarettes ,
and hence wouldn’t stand out as the discount of the smuggled cigarette had narrowed
considerably.
The matter relating to state taxes is
pending before the Supreme Court, and some analysts feel that there is a strong
probability of the ruling being in ITC’s favour. In the past year and a half, at
least six states have imposed fresh taxes on cigarettes and some other states have
increased their taxes. Clearly, a ruling in ITC’s favour would result in a windfall
for the company.
Also the ban on gutkha effected by some
major states could stem the declining trend in the share of cigarettes in total tobacco
consumption. The discounting of 12 times FY03 earnings, therefore, hardly reflects the
improving fortunes at ITC. The message, clearly, is that despite improving fundamentals,
concerns of low dividend payouts and the continuous infusion of funds in unrelated
businesses still remain.
