The Hindu Business Line : ITC: Buy

INVESTORS can consider taking fresh exposure in the ITC stock (Rs 145), which quotes at 27 times its trailing 12-month earnings. Valuations and growth prospects appear attractive relative to its peers in the fast-moving consumer goods (FMCG) space . Investors can, probably, hold on to the stock for getting returns commensurate with risks. In addition, the ITC stock is usually sluggish in the run-up to the Budget; one can take this opportunity to accumulate the stock.

After attaining a near-monopoly in the cigarettes business, ITC has stepped up investments in other product lines in the FMCG space. It has also announced large investment initiatives in its e-Choupal network and paperboards business. The growth potential in the hospitality sector, which accounts for a substantial proportion of ITC's investments, is also attractive. These factors add sheen to the long-term growth prospects. In the short-term, earnings growth would be driven by the cigarettes business. With a rise in both rural and urban incomes, short-term prospects appear attractive. The principal risk factor relates to a rise in excise duties in the coming Budget and even that will only mute earnings growth.

In the cigarettes segment, ITC is expected to maintain the pace of growth, as it strives to enhance the product-mix in favour of high-value brands. Strong growth in disposable income provides the enabling environment for improving the product-mix.

A high asset-turnover ratio and attractive margins in this business also ensure sustained cash flows. ITC, to keep look-alikes of its brands off the market, has redesigned some of its packs under the Gold Flake brand. Despite the continuing presence of contraband trade, the company has been able to increase volumes.

Relying on the strength of its distribution channel in the cigarettes business, ITC has ramped up growth in its foods business too. Its FMCG (non-cigarette) business has grown at 196 per cent over the past three years and has continued to maintain this pace in FY-06. During the first half, revenues from this business doubled. Though earnings continue to be negative, it appears to be on the verge of a turnaround. Having established its presence in the biscuits and paper products, brand promotion costs are likely to be lower. The company has a significant potential for growth in the biscuits segment. Its aggressive distribution initiatives pose a threat to Britannia's dominance in this business. The John Players brand in the garment business is also on a growth path.

Consolidation and expansion in the hotels business has provided a boost to revenue and earnings growth. Its foray into Tier-II cities by way of operating tie-ups is expected to add value to its consolidated earnings. In FY-05, ITC has outperformed its peers in the hospitality industry. Commissioning of its proposed hotels is an added positive. Having ramped up capacity in its paperboards and paper business, ITC has registered a 20 per cent revenue and earnings growth. Its coated paper business offers potential for growth.

The agri-business, which chiefly consists of its Internet kiosks, accounts for about 16 per cent of its revenues. Margins and returns from this business have improved to respectable levels. The business has attained self-sufficiency with cash earnings exceeding funds pumped into the business. Though earnings dipped in the first half, there has been a 41 per cent growth in revenues.

A healthy investment book, improving performance of non-cigarette business and sustained strong cash flows from operations, lend confidence to ITC's long-term growth prospects.

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