MOFSL has come out with a report on ITC noticing that the cigarette volumes are down. Market usually always wants ITC to be less reliant on cigarette volumes but when one goes through that report, it seems as if now the market is worried about the falling volumes.
Absolutely. It is happening because of the tapering in at home consumption and a sharp commodity cost inflation. This could affect the strong EBIT growth that ITC has seen in the FMCG vertical and this would prevent the contribution of cigarettes in the overall EBIT to decline and could be about 80% or so. So globally, cigarette volume has been on a declining trend, given the health consciousness among consumers and even the government is doing its bit in terms of setting up a panel to come out with a comprehensive tax policy proposal for all forms of tobacco from a health perspective.
So there will be some sort of an overhang of that policy change and it could affect the cigarette volumes. In the meantime, if we do not see any positive traction on the non-cigarette business, then the stock could remain a bit subdued. There has been a big debate about whether ITC is a great value story or not, but at the end of the day, what investors would really focus upon is whether it is actually performing in line with the market in a given timeframe. In this backdrop, ITC could remain an underperforming stock at this point of time.
How is it that you are looking at the entire telecom space right now? After the tariff hike by Bharti Airtel, followed suit and hiked tariffs by about 20%. Now all eyes are on Jio. Where within telecom are you finding comfort to buy afresh?
All of us have been talking about when the price hike will finally kick in and though at various points of time, managements did indicate that it should come through soon, we had to wait for almost eight quarters before somebody could actually do that at the ground level. Now both Bharti Airtel as well as Vodafone have taken a price hike of 20% and because a large number of users are in the prepaid segment where these price hikes have been implemented, we feel that it would do a lot good to all the companies particularly Bharti Airtel.
We are looking at a significant increase in the EBITDA and free cash flow in Bharti Airtel over the next two to three years and that would definitely be one of the biggest beneficiaries because of the kind of positioning that it has right now. Vodafone had its own issues to deal with and to a great extent, they have escaped big issues in terms of company insolvency. Now that things are stabilising and this news is coming at a time when things are on their way up, it would help Vodafone India to salvage the situation by improving the EBITDA margin.
However, one must remember that even if Vodafone takes a similar kind of price hike like Bharti because of the kind of freebies and other things that they are giving away, the actual impact on EBITDA for Vodafone India maybe less and it had its own debt commitments, etc,
So there might be a short-term spike in Vodafone but one is not very sure how sustainable it would be and clearly it remains to be seen now how Jio takes these things forward and there is a high expectation that finally they will also do a price hike, given that there is a big gap between the pricing of Airtel and the current pricing of Jio.
