ITC had raised prices by 10-20 per cent across cigarette brands in 2020 when the NCCD was hiked last time.
ITC Shares Hit Lifetime High: Shares of FMCG major ITC Ltd. gained 6.5 per cent to a fresh 52-week high on Thursday. The stock jumped higher eve after Finance Minister Nirmala Sithraman in her Budget 2023 speech announced a hike in duty on cigarettes by 16 per cent, implying a 2-2.5 per cent increase in overall tax incidence on cigarettes.
Brokerages believe that the proposed tax hike on cigarette in the Union Budget 2023 is not very high and would be easily passed on through small price increases.
Read More: Adani Enterprises Calls Off Rs 20,000 Crore FPO, Will Refund Investors
Nuvama estimates that cigarette companies may only need to pass on a low single-digit hike of around 2-3 per cent. This, it says, is not an issue given there were no price hikes passed on to consumers in the past 2-3 years and hence, will be absorbed by consumers.
ITC had raised prices by 10-20 per cent across cigarette brands in 2020 when the NCCD was hiked last time.
The stock has been witnessing strong traction in the last one year as it has significantly outperformed its sectoral index BSE FMCG and the benchmark index Sensex.
ITC is one of the biggest cigarette makers in the country; over 40 per cent of the total business for ITC comes from the cigarette segment.
As per brokerage firm Kotak Institutional Equities estimates, although ITC’s non-cigarette businesses have scaled up well in the past few years, cigarettes contribute 77 per cent to EBIT and 55 per cent to valuations.
However, brokerage firms are not worried about the prospects of the company as they find the tax increase a modest one.
“The modest tax increase, and that too after a gap of three years (the last two tax increases in February 2020 and July 2017), should allow steady volume-led revenue growth and associated growth in tax revenues – overall a win-win situation for ITC and the government,” said Kotak Institutional Equities.
Kotak believes ITC has headroom for price increases to offset higher taxes, improve net realization and play portfolio strategy to drive share gains.
Kotak added that the clarity on taxes also removes the overhang on the stock and improves earnings visibility.
“A well-defined, predictable taxation policy and moderate tax increases should improve earnings visibility; this year’s budget is a step in that direction,” said Kotak.
The brokerage firm has an ‘add’ call on the stock and raised the target price to Rs 400 from Rs 380. It expects ITC’s cigarette revenue growth of 6-7 per cent and EBIT growth of 8-9 per cent in FY24.
Brokerage firm JM Financial said the tax hike in the Budget is very marginal and ITC could offset the entire impact through a blended nearly 1-1.5 per cent price hike at the portfolio level.
JM Financial maintained a buy call on the stock and raised the target price to Rs 440 from Rs 395.
“We are encouraged by the fact that it is now quite evident that the government is able to better appreciate the legal industry’s logic that a punitive taxation regime on legal cigarettes alone does not necessarily help control the use of tobacco in the country, but instead causes migration out of tax-paid cigarettes into illegal channels. This should evidently drive a further re-rating of the ITC stock, in our view,” said JM Financial.
“We have for long reiterated that the government’s increasingly logical stance on tobacco taxation would be one of the key value drivers for the stock; we now up our target multiple from 23 times to 25 times to reflect what appears to us to be a more supportive policy environment -ITC continues to be one of our favoured consumer picks,” the brokerage firm added.
ITC shares have gained more than 85 per cent from their 52-week low of Rs 207, touched on February 24, 2022.
