The share price of cigarette-to-hotel major ITC slipped further 3 percent to touch a 52-week low of Rs 211.95 on February 3 after the Budget proposed to raise excise duty on tobacco and cigarettes.
ITC is India’s largest cigarette-maker.
“If the cess on cigarettes is increased it would affect sales volumes of ITC’s cigarette business as the company will pass on the increase in rate to consumers through price hikes,” KR Choksey had said in its Budget expectations report.
On February 1, the share closed 6.97 percent, or Rs 16.40, down at Rs 218.85.
A day earlier, the company had registered a 29.07 percent year-on-year growth in Q3FY20 profit, largely driven by lower tax cost, beating analyst expectations.
Standalone profit for the quarter stood at Rs 4,141.9 crore, increased from Rs 3,209.1 crore in the corresponding period last fiscal.
Revenue growth of 5.1 percent YoY at Rs 12,103 crore for the quarter was also beat expectations.
Earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 6.6 percent to Rs 4,612.6 crore and margin expanded by 60bps to 38.4 percent in the quarter ended December 2019 YoY.
According to Sharekhan, the tax rate on cigarette increased by 6-12%, depending on the size of the cigarettes. The weighted average tax rate increase for ITC stands at 9 percent.
The cigarette sales volume growth continued to remain muted at 2 percent in Q3FY2020, while price increase of 10 percent would put further stress cigarettes sales volume in the near term.
“We have reduced our earnings estimates to factor in lower-than-earlier expected cigarette sales volume for FY2021 and FY2022 and downgraded our rating on the stock to hold with a revised price target of Rs 242,” it said.
ITC is trading at a P/E of 15x FY22E earnings, which is at a significant discount to its peers. It has continued with a buy rating on the stock, with a target price of Rs 270 per share.
According to Dolat Research, though the stock is trading at a steep discount to other FMCG peers, it would remain under pressure. It downgraded the stock to reduce, with a target price of Rs 238 per share.
Investec has maintained a buy call but cut the target to Rs 259 from Rs 290 per share.
“It is first sizeable increase in taxes on cigarettes since July 2017 and we expect the company to raise prices by over 6-7 percent,” it said.
The research house cut EBITDA estimates by 3.7/5.6% for FY21/22, cut cigarette volume & EBIT growth assumptions from 4% to 2% for FY21/22, while maintaining buy due to decadal low valuations.
The regulatory overhang will keep earnings visibility under check.
JPMorgan has downgraded the stock to neutral from overweight and cut target to Rs 235 per share.
The tax hike would impact volume growth and weigh on stock multiples. The strong economic franchise makes it attractive at 5-7 percent potential downside.
With NCCD hike, tax incidence is 10 percent higher versus pre-budget levels and expect higher price increase to drive positive EBIT growth, it said.
It forecast 12 percent price hike over FY21 to deliver cigarette EBIT growth of 5 percent and lower FY21/22E EPS estimates by 3 percent. Also, EBIT growth forecast lowered to 5 percent in FY21.
At 0917 hours, ITC was quoting at Rs 212.05, down Rs 6.80, or 3.11 percent, on the BSE.