ITC shares, which have already underperformed its FMCG peers and benchmark index in the last one year, can fall further if excise duty hike on cigarettes surprises negatively or is more than 15 per cent. Most brokerages estimate excise duty hike on tobacco products to be in the range of 8-15 per cent
Below ₹275 possible Even if there is no hike, IIFL believes that the stock cannot rise beyond ₹360 in the near term. “A 15 per cent increase in excise duty may result in just 1.6 per cent cigarette EBIT growth next year (vs our current estimate of 9 per cent), resulting in the stock falling close to ₹275,” it said in a note.
While Religare Institutional Research, Nomura and Motilal Oswal have a similar view of a considerable hike in duties on cigarettes and are neutral to negative on ITC, Angel Broking and Edelweiss expect only a marginal increase in excise duty.
“In the upcoming Budget, the industry is expecting just a marginal hike in excise duty on cigarettes, which would provide some respite to the industry. On such anticipation, we are positive on ITC. Further, considering that the stock price of ITC has corrected significantly in the past one-year period, the stock now poses a good buying opportunity at the current levels,” Angel Broking said.
Muted hike only: Edelweiss “Given flattish tax revenues from cigarettes and huge illegal market share, logically tax increase should be muted. However, we still do not rule out 8-10 per cent hike in excise duty for cigarettes,” it said.
ITC shares fell 2.02 per cent to close at ₹293.8 on the NSE on Friday on media reports that the government may hike tax on all tobacco products in the upcoming Union Budget by up to 40 per cent.
In the one month preceding the past 15 Budgets, ITC shares have declined nine times. And in the one month following the Budget, the stock has gained in seven out of these nine times.
Consecutive hikes The Centre has raised duties on cigarettes in the last four consecutive years. Cigarettes form around 50 per cent of ITC’s revenues but close to 75 per cent of the segment profit. Volumes have been impacted immensely and have declined year-on-year in the range of 2-17 per cent for the last eleven consecutive quarters as the company passed on the hikes to customers though the same helped it in maintaining profitability. In the first half of FY16, cigarette volumes declined 16 per cent y-o-y.
Not cheap enough: IIFL Motilal Oswal expects a blended excise duty increase of 10 per cent. Further, it expects ITC to implement a weighted average price hike of 10-11 per cent to pass on the excise duty increase and hence, volumes to decline 8-10 per cent in FY17.
The ITC stock trades at 21 times FY17 estimated earnings. IIFL believes it is not cheap enough to be bought on valuation alone and advises investors to wait for clarity to emerge before taking any action.
“Other risks, such as GST coming in at a higher than current rate (or states increasing rates aggressively in anticipation of this), could affect the stock over and above the Union Budget,” it has cautioned.
Global tobacco majors with similar earnings growth expectations are trading lower than ITC, analysts pointed out.