{LONGTERMINVESTORS} Stock Update-ITC, Bharti Airtel

March 22, 2016   Stock Update ITC Reco: Buy PT: Rs375 CMP: Rs324 No hike in VAT on cigarettes in key states; maintain Buy with revised PT of Rs375   Key points No increase in VAT rate in key states: After a moderate increase of 10% in excise duty on cigarettes in the Union Budget 2016-17, the key states, such as Maharashtra, Karnataka, Kerala, West Bengal and Andhra Pradesh, have skipped cigarettes from value-added tax (VAT) rate hike in their respective state budgets. These five states together constitute about 50% of ITC's cigarette sales volume. This will be a relief for ITC and other cigarette manufacturers as it will release the pressure on the cigarette sales volume in the coming months. Price increase in Kings by 13%; no incremental price hike in near future: Our channel checks suggest that the company has hiked the price in its cigarette portfolio. The price of Wills Classic Mild and Gold Flake Kings has been increased by Rs10 per pack to Rs125 (for a pack of 10 cigarettes). The price of a Gold Flake (regular) stick is likely to go up by 10-13% in the coming months. The price increase undertaken will be to pass on the excise duty hike of 10% on cigarettes, which we have already factored in our earnings estimates. We don't expect any incremental price hikes in key selling brands in the coming months as major states have kept VAT rate unchanged in their respective budgets. Pressure on cigarette sales volume to reduce: With no incremental price increase expected in near future, we expect cigarette sales volume to stabilise in the near future. We expect the cigarette sales volume to get back in the positive trajectory in Q3-Q4FY2016. We have factored in a low single-digit volume decline for FY2017 and a volume growth of 6% in FY2018E. Retain Buy with revised PT of Rs375: After four to five years of steep increase in the excise duty/VAT rate on cigarettes, the central and state governments have shown some leniency towards the cigarette industry (in the backdrop of rising sales of illicit cigarettes in the market). With pressure easing off on the core cigarette business, we expect ITC's performance to improve in FY2017 and FY2018. The stock is currently trading at 19.8x its FY2018E earnings, which is at a stark discount to its average one-year forward multiple of 24x. Hence, in view of the receding concerns on cigarette sales volume, we have upgraded the target multiple on the stock from 22x to 23x and revised the price target to Rs375 (valuing the stock at FY2018E earnings). We maintain our Buy recommendation on the stock.   Bharti Airtel Reco: Hold PT: Rs360 CMP: Rs351 Encouraging strategic moves; maintain Hold   Key points De-leveraging through divestment of passive infrastructure assets: Bharti Airtel in its effort to de-leverage its debt via monetisation of its passive infrastructure in Africa has entered into an agreement with the American Tower Corporation (ATC) for the sale of 1,350 towers in Tanzania, for a likely consideration of Rs1,200 crore. Earlier, Airtel Africa had divested its tower assets in four countries for an aggregate consideration of approximately Rs10,000 crore. We believe that after the consummation of the tower deal, Bharti Airtel's FY2016 net debt to EBITDA (ex spectrum payouts) would stand at 1.8x (vs 2x at FY2015 levels). Expanding its data footprint: Apart from divesting the passive infrastructure to de-leverage the debt, Bharti Airtel is also aggressively enhancing its 4G foot print, via launch of its services (taking the first-mover advantage), improving its network capabilities and building for exponential data growth ahead, by acquiring high-speed spectrum via auctions and other alternate routes. In an effort to enhance its spectrum quantity and improve its 4G footprint, Bharti Airtel has entered into an agreement with Videocon Telecommunication Ltd (VTL) acquiring spectrum rights in six crucial circles for Rs4,428 crore. The consummation of the deal would extend its 4G coverage in 19 circles from the current 15 circles and cover close to 90% of its revenue base. Retain Hold rating; preferred bet in telecom space: Bharti Airtel's effort towards improving its 4G reach, making Africa a self sustained business (via tower sale) and overall aggressive investment in its network (announced Rs60,000-crore capital expenditure [capex] to be spread over the next three years) spells of the aggression the leader possess to combat the likely competition in form of impending launch of Reliance Jio. Thus, we believe Bharti Airtel is the best bet in the telecom space. However, after the recent run-up and sentimental effect of Reliance Jio launch and aggressive pricing of spectrum by the government, the stock should take a breather in the near term. Thus, we have retained our Hold rating on the stock with an unchanged price target of Rs360.     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. Regards, Sharekhan Fundamental research team www.sharekhan.com

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