1QFY08 beats expectations

1QFY08 net profit growth of 20% to Rs7.8bn was ahead of our expectations of 15% growth. Key positive surprise was higher-than expected cigarette margin expansion, driving cigarette EBIT growth of 15%. Cigarette volumes declined marginally though.

Don’t extrapolate 1Q to rest of the year

Two factors to keep in mind 1) Price hikes came only towards end April, so adverse volume impact is only for two months. Volume decline will accentuate in 2Q, but trend is likely to improve in 2H 2) UP trade tax of 33.5% (impacts 5% of volumes) was levied in June – so tax payout was only for one month. Expect this to increase in 2Q, paring margins.

However cigarette EBIT should continue to grow

Given that price hikes are heavily loaded towards the mid-end brands (65% of volumes), cigarette EBIT profits should continue to grow going forward, despite declining volumes.

Two negative surprises in 1Q results

Paper sales growth slowed to 5%, while EBIT declined 17% due to a plant shutdown and inventory rundown in expectations of signage changes on cigarette packs; growth will be back to normal in 2Q. Hotel business sales also slowed, mainly due to transition of 7 hotels from 'Sheraton' to ' Luxury Brands'. Management expects growth to pick up from 2Q.

Maintain Buy

Despite better than expected 1Q, we maintain our EPS estimates and FY08E cigarette volume decline assumption of 5%, which leaves room for positive surprises. Maintain Buy, Price Target Rs195.