ITC : Filtering growth

Higher prices could lead to lower volumes.

India's leading cigarette manufacturer ITC, which commands a market share of 74 per cent, will need to cough up about 17 per cent more by way of excise duties from FY09.

That's a consequence of the hike in excise duties for plains, where the duty is up from 56 paise to Rs 132 paise per stick and for micros where it has gone up from 17 paise to 82 paise per stick. Micros and plains together account for about 20 per cent of cigarette volumes, but contribute less than 10 per cent of profits.

It's not clear how exactly the higher duties will be passed on. The Rs 12,369 crore ITC could choose to spread the price hike across the entire portfolio rather than raise prices of just non-filter brands.

Either way, there could be some impact on volumes, which are now estimated to grow by about 1 per cent in FY09. Nonetheless, ITC has the advantage of a big portfolio and, therefore, an option to cross-subsidise non-filters.

A larger proportion of sales of higher-end products will boost margins and over time, it may choose to exit plains and introduce regular filter cigarettes at lower price points because the hike on non-filters means the migration from bidis to cigarettes will be slower. Currently, plains cost Rs 1.5-1.75 per stick while micros are priced at Rs 2-2.25 per stick.

ITC has gradually been foraying into new areas; it now a presence in hotels, paper, foods and lifestyle products. However, more than 75 per cent of its revenues accrue from cigarettes.

Over the last 12 months, the stock has underperformed the Sensex by 12 per cent primarily because of concerns about VAT, which was imposed at 12.5 per cent and threatened to dampen volumes. Between FY05-07, the stock has traded at an average forward multiple of 24.

The stock, which at Rs 193, trades at 19 times FY09 estimated earnings, is not cheap, given that earnings are expected to grow at around 20 per cent over the next couple of years. However, it could be a good defensive play.

Maruti Suzuki: Swift on the fly

The Maruti Suzuki stock closed just under a per cent higher at Rs 874 on Monday, even as the rest of the market fell apart. With the excise duty on small cars down to 12 per cent from 16 per cent, Maruti, which derives nearly 80 per cent of its total sales from the small car segment, is a big gainer.

Without much ado, the company has reduced prices ranging from Rs 6,500 for the Maruti 800 to Rs 18,030 for the Swift Diesel.

That should boost volumes for the Rs 14,653 crore car maker, which commands nearly 50 per cent of the car market. Between April-February 2008, Maruti's sales rose over 15 per cent as it sold 6. 9 lakh units and it should end the year with about 7.5 lakh vehicles.

In FY07 and FY06, the company posted a volume increase of 20 per cent and 5 per cent respectively. Assuming a 20 per cent growth in FY09, Maruti should sell just over 9 lakh vehicles.

Lower prices apart, what could fuel car volumes is the additional money in the hands of taxpayers thanks to changes in the rates of personal income tax.

However, interest rates too need to come off somewhat, if demand is to pick up. For Maruti,the high-margin Swift has been one of the best selling models and should continue to drive growth.

Demand has been weak over the last two months but if it does pick up, the company's earnings per share for FY09 could be higher at Rs 80 levels. Over the past one year, the stock has under-performed "� it has gained just five per cent as compared to a 35 per cent rise in the Sensex.

At the current price of Rs 874, the stock trades at a reasonable 10.9 times estimated FY 09 earnings and should be an outperformer.