ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs220
Current market price: Rs162
VAT fears allayed
ITC had been underperforming the market owing to fears of the implementation of the value-added tax (VAT) and a hike in the excise duty on cigarettes (read our report, "All-round performance", dated February 01, 2007). Finally in this budget, the excise duty on cigarettes was increased by 5% and the hike was at the lower end of the expectations. Moreover with no change in the additional excise duty, the fear that VAT may be levied sometime in the near future has been allayed. The likelihood that the government may allow VAT on cigarettes through a separate amendment also appears low.
SECTOR UPDATE
Tyres
Rubber's loss, tyre's gain
The easing of the rubber prices is a positive development for tyre makers, given the fact that rubber accounts for around 39% of the total raw material cost.
In the past, owing to a buoyant demand scenario, the tyre manufacturers had been able to pass on a large part of the increased cost of inputs to user industries. Most of the tyre majors have announced a number of price hikes in the last twelve months (in the region of 20-25%). In fact, a price hike was initiated in February this year to pass on the upmove in the rubber prices during January. Apollo Tyres raised its prices in the passenger car radial segment by about 2% while MRF Tyres raised the prices by about 1.5-2%. The price hikes has limited the adverse impact of the rising input costs on the margins of the tyre manufacturers. We have also noticed that the tyre prices tend to remain sticky and do not come down as sharply with a fall in the raw material prices.
Download here