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ITC cigarette volume to fall, says Merrill

Cigarette volumes at ITC Ltd, India's largest tobacco company, will drop sharply in the current year as a recent price hike hurts demand, Merrill Lynch said in a report dated April 10.

"We expect FY 02 to be a tough one for ITC...given our fundamental concerns we maintain our reduce rating on the stock," analyst Vandana Luthra said.

Cigarette volumes are expected to fall 6.8 per cent in 2001-02, after the company hiked prices by an average 11 percent in March, the report said.

A similar hike in November last year had cut into sales leading to volumes falling by 3.4 per cent in the fourth quarter of 2000-01. This fall ended five quarters of continuous year-on-year-growth, Merrill said.

ITC is India's largest cigarette maker and is owned 31.7 per cent by British-American Tobacco Plc.

"Unlike in the last few years, when (volume) only in the non-filters had been falling, in the current year we expect the filter cigarettes to also fall," the report added.

This is bound to affect margins, though the loss could be made up by a cut in media spending.

"We expect advertising expenditure to fall 20 per cent which would expand earnings before interest, tax, depreciation and amortisation margin by 2.9 per cent despite filter cigarettes falling," the report added.

ITC's stock is up 20 per cent in the last one month, but most of the buying was caused by the shift towards defensives due to the turmoil in technology stocks, Merrill said.

Upside in the long term would depend more on volume growth than price increases though the hikes could boost profitability and margins.

ITC shares were up 1.11 per cent at Rs 823 in afternoon trade, while the Sensex was 2.06 per cent higher.

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