Search the Internet          Tips  Sites: Finance, Investment

DSP sticks to 'reduce' on ITC

NetScribes/ Rajiv Banerjee

DSP Merrill Lynch Ltd (DSPML) has maintained its ‘reduce’ rating on ITC Ltd. In a report dated April 10, 2001, the stockbroking firm says that the company’s near-term strategy of achieving profit growth through price hikes and ad spend cuts is not sustainable in the long-term.

On the Bombay Stock Exchange, the scrip closed at Rs 852.15 on Tuesday, up Rs 7.65 from its previous close. A total of 220, 020 shares were traded at the counter.

Ever since it fell to a low of Rs 700 on the day of the Union Budget, the stock has been on a steady rise, gaining as much as 21 per cent.

The report attributes the current rise to low valuations when it fell to Rs 700. “The continuing uncertainty in TMT (Technology, media, telecom) stocks has been a positive for consumer defensives, especially for ITC, given its large weightage on the Sensex,” the report says.

The report predicts a tough fiscal 2001-02 for ITC on account of the steep price hike in March 2001. “Compared to the average 5 per cent increase in November, the hike in March was steeper at 11 per cent and hence will hit cigarette demand even harder going forward,” it says.

DSPML expects cigarette volumes to fall 6.8 per cent in FY 2002. Unlike the last few years, when only non-filters had been falling, FY 2002 will see even filter cigarettes fall, thus causing a decline in overall volumes, the report points out.

The Centre’s increasingly anti-tobacco policy and harsher excise duty increases are also seen impacting volumes. “Unlike the western markets, cigarette demand in India is not price insensitive. Hence, falling volumes cannot be compensated by higher prices,” says the report.

A cut in ITC’s ad spend following the ban on cigarette sponsorships in sports and cultural events is expected to compensate for poor margin expansions in FY 2002. The report expects ad spend to fall 20 per cent, which would expand operating margin by 2.9 per cent, despite falling filter cigarette volumes.

In the long-term, though, this strategy is seen eroding ITC’s brand equity. The report warns that it could also slow down the process of consumers upgrading from non-filter to filter cigarettes, which is a key to growth in an environment where overall cigarette volume growth is likely to remain poor.

Money

Market Impact

Tell us what you think of this report