Citigroup - ITC, Tata Tea

Citigroup recommends a Sell on ITC after 4QFY07 as One-Time Costs Pare Profits, No Visible Re-rating Triggers

ITC’s 4Q net profits (pre-exceptional) grew 14.6% yoy, below our estimates of 18% growth. Growth would have been stronger at about 20% but for one-time expenses on transiting the branding of seven key hotels from ‘Sheraton’ to Starwood’s ‘luxury collection.’ In addition, aggressive launch expenses for ITC’s wafers brand ‘Bingo’ impacted profitability.ITC’s foods business is expected to break even by FY09E. Target price of 130.

Citigroup recommends Buy on Tata Tea. Glaceau Stake Sale Positive, but Growth Opportunity Lost. While they view positively Tata Tea’s sale of its stake in Glaceau to Coke, we believe that a potential long-term growth opportunity may have been lost. In the circumstances though, they believe that selling out and using the funds more judiciously, rather than remaining a minority stakeholder, is the best possible outcome . They raise the target price for Tata Tea shares to Rs1,150 from Rs960 based on 15x mid-FY09E P/E. The target increase is driven by 1) increasing FY08E-FY09E EPS estimates by 6.9%-20.2%, and 2) rolling forward their earlier 15x target multiple to mid-FY09E.