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ITC trading cheapest among peers as fear of GST hike worries Street

ITC has underperformed the BSE FMCG index which is down about 5 per cent in the last one month.

, ET Bureau|
Dec 12, 2019, 08.11 AM IST
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Goldman Sachs maintains overweight on stock with a target price of Rs 845 per share. "GCPL is likely to report acceleration in domestic volume growth," the brokerage said. It is tactically positive on GCPL post the recent correction and believes the share price will rise relative to index.
Goldman Sachs maintains overweight on stock with a target price of Rs 845 per share. "GCPL is likely to report acceleration in domestic volume growth," the brokerage said. It is tactically positive on GCPL post the recent correction and believes the share price will rise relative to index.
Tobacco-to-consumer goods conglomerate ITC is languishing near its lowest levels of 2019 amid concerns the upcoming Goods and Services Tax Council, which is meeting on December 18, could increase taxes on cigarettes. Notwithstanding the worries about a possible tax hike on cigarettes, most analysts have ‘buy’ recommendations on the stock as ITC is among the cheapest consumer stocks, trading at a discount of around 30 per cent to its 10-year average valuation.

The stock ended up 1 per cent at Rs 238 on Wednesday, near its 52-week low of Rs 234.10 which was hit on September 18. With GST collections of states falling short, there are rising expectations of a tax hike on cigarettes which has led to ITC shares falling over 20 per cent from their recent peak in April this year and 8 per cent in the last one month.

“States are not happy with the cess they are getting from the central government so the fear is that cigarette taxes may go up as it is one of the key components of the cess. It has been around 18-19 months since there have been no tax hike on cigarettes, so at some stage the taxes have to go up,” said Abneesh Roy, senior vice-presidentinstitutional equities at Edelweiss.

“Valuations are cheap and profits are growing at 9-10 per cent but if the tax hike is over 10 per cent, it will be seen negatively as it will then impact volumes. A 5-8 per cent hike will be absorbed,” said Roy. The group derived 46 per cent of its total revenues from cigarettes. Consumer businesses contribute 25 per cent to its revenue. Hotels and agri-businesses contributed 4 per cent and 12 per cent to its total revenues, respectively.

ITC, which sells brands such as Sunfeast biscuits and Gold Flake cigarettes, is trading at 19.1 times estimated price-to-earnings ratio, according to Bloomberg data. Of the 38 analysts tracking the stock, 34 have a ‘buy’ rating and four analysts have a ‘hold’ rating.

The company posted a standalone profit growth of 36.2 per cent in the three-months ended September at Rs 4,023 crore – its highest ever quarterly profit-due to fall in tax expenses and tax credit. Its cigarette business posted 6 per cent growth in gross revenue at Rs 5,326.8 crore.

Rising competition from peers in the tobacco sector has also weighed on the stock recently, said some analysts. ITC has underperformed the BSE FMCG index which is down about 5 per cent in the last one month.

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​Goldman Sachs on GCPL

11 Dec, 2019
Goldman Sachs maintains overweight on stock with a target price of Rs 845 per share. "GCPL is likely to report acceleration in domestic volume growth," the brokerage said. It is tactically positive on GCPL post the recent correction and believes the share price will rise relative to index.
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“The company is facing competition from VST Industries and GPI – both of them have 10 per cent market share each now and they are going pan-India. The company has not been able to take price hikes because of the economic slowdown and competition from other players,” said Vishal Gutka, VP-consumer and retail at Phillip Capital. “Volume growth has been in low-single digits in the last few quarters and we don’t see any meaningful upside. If the cess on cigarettes is hiked, volume may even decline,” said Gutka. Phillip Capital has a ‘buy’ rating on the stock despite these concerns as it is one of the cheapest consumer stocks.

Others believe that any impact on volumes in the event of a cigarette tax hike will be temporary.

An analysis of historical trends confirms that when consumers are faced with a tax increase on cigarettes after a period of relatively benign pricing, the impact on volumes is short lived, said Morgan Stanley, which has an ‘overweight’ rating on ITC with a target price of Rs 370.

IIFL believes that a cigarette tax hike is possible but it is not a near uncertainty which the market seems to be pricing in. “A nil-tomoderate tax hike will remove the event risk on the stock. The case for a high-tax hike is weak, given the lack of revenue-generating potential and a resultant surge in demand for illegal cigarettes,” said Percy Panthanki of IIFL in a note on Wednesday.
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