Against all expectations, the government kept the cess and taxes on tobacco and cigarettes unchanged. ITC is the market leader in cigarettes with nearly 80 per cent market share.
“There was no mention of any change in the cess on cigarettes in the Budget. We see this ‘no negative’ news in the Budget on cigarettes/tobacco products as a positive for organised players like ITC till the next Budget,” said analysts at Nirmal Bang Equities.
Shares of ITC have rallied over 11 per cent since Budget. The scrip hit a high of Rs 239.20 on BSE on Tuesday. That met JPMorgan’s 12-month price target Rs 225. On Wednesday, the stock traded nearly 1 per cent lower at Rs 227 in a depressed market.
The US-based brokerage said with the tax overhang gone, the focus is now back on underlying demand recovery. “We upgrade FY22 EPS estimates by 4 per cent. Better-than-expected cigarette revenue recovery and business restructuring would be key catalysts,” it said in a note.
ITC has been at the centre of discussions on many investor forums recently, largely because of its underperformance vis-à-vis FMCG peers, which command richer valuations. ITC trades at 21 times its earnings compared to 72 times for HUL and 49 times for Britannia.
Concerns have been raised over the company being in the ‘sin goods’ business, which keep ESG investors at arm’s length. Apart from that, shareholders have also questioned its diversification into non-performing businesses, like hotels.
But analysts believe some of these concerns will get mitigated now. Credit Suisse sees multiple triggers for the stock to earn a re-rating going ahead.
“We expect investors to focus on other drivers. Increase in FMCG ebitda, business value and restructuring are some of them. The probability of a GST increase is also low now,” the Swiss broker said. It has set the 12-month price target at Rs 255, which means 11 per cent upside from current level.
Some analysts, including those at CLSA, have pointed out that lack of any major incentives for retail and FMCG industry in the Budget could be a negative factor for the sector. But how much will it hit the topline of the company needs to be seen.
For now, the focus will shift to the earnings report scheduled for February 11. If the numbers surprise positively, it could lift the stock further. Peers have reported improved numbers.
Axis Securities in a projection said ITC’s net profit will grow 11 per cent sequentially, but will be down 13 per cent year on year. It also expects margins to contract due to weaker product mix.
“Underlying cigarette volumes are expected to be in positive YoY, as lockdown restrictions eased. The FMCG segment is expected to report a healthy 15 per cent YoY growth, driven by demand for health and hygiene foods and other discretionary products. The hotels segment is likely to be a drag, as operations continued to remain impacted. Agri & paper board segments should support overall growth,” the brokerage said.
