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Saturday, October 10, 2009

ITC and United Spirits:Future growth prospects and outlook

1)Scripscan:ITC Ltd
cmp:227
Code:500875

Story:FMCG stocks have dropped on rainfall concerns; so has ITC, despite no correlation between cigarette sales and monsoon. There is concern that competition will increase for ITC as Marlboro cigarettes, earlier available via imports, will now be produced and distributed locally, by Godfrey Phillips India.I believe the impact on ITC will be minor and stretched over a long period. If this happens, ITC has the flexibility to offset it with price increases without affecting volumes meaningfully. The company has already implemented an average price increase of 5% (Bristol and Goldflake Kings prices taken up 10-20%) which is factored into the forecasts. The potential for price increase on other brands (Scissors, Navy Cut, Capstan), which represent a third of sales and which have seen no price hikes for over two years, represents scope for EPS upside of 5% on an annualised basis in the estimates.A good hold as of now.

2)Scripscan:United Spirits Ltd
cmp:909
Code:532432

Story:United Spirits reported consolidated PAT loss of Rs 410 crore during FY09 which is disappointing. This loss was largely on account of certain non-recurring charges at Whyte & Mackay. Adjusting for the non-recurring expenses, PBT was Rs 280 crore during FY09 (-39% y-o-y).I believe this could be on account of a rupee depreciation versus the US dollar and higher working capital loans.I await more details from the FY09 annual report which is not yet available. While there is a probability of write-backs for forex losses as current forex movements have turned favourable, UNSP''s plans of de-leveraging could limit the extent of write-backs. In case of pension liabilities, if losses continue then the company will have to make increased contributions to meet the deficit. The company has also made some changes in the balance sheet in terms of increase in investments, reversal of goodwill, and accounting of IPL franchise rights as intangible assets to be amortized over 50 years and increase in liabilities due to IPL franchise ownership.I hope to get detailed disclosures on the same in the annual report in order to assess the impact of these changes in the balance sheet. Pending concerns on balance sheet leverage are likely to cap gains from any improvement in domestic operations. News flow on UNSP''s efforts to de-leverage should keep the stock volatile in the near term.A sell on rally counter as of now.

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