ITC: GST Relief Triggers Bullish Brokerage Calls

ITC Ltd. jumped as much as 6.7 percent after it became apparent that the implementation of the Goods and Services Tax regime would not have any material impact on the taxes on cigarettes.

The GST Council on Thursday finalised a four-tier tax structure, with standard rates of 12 percent and 18 percent and two more rates of 5 percent and 28 percent.

Essential goods will be taxed at the lower rates, while luxury and demerit goods, like tobacco products and aerated drinks, will be included in the highest bracket. The government will also levy an additional cess on top of the highest tax rates.

"The cess will not be an additional burden on the taxpayers because the total of 28 percent and cess will not exceed the total of the existing levies,” Finance Minister Arun Jaitley said in the press conference on Thursday.

The minister’s statement implies that there will be no material change in tax on cigarettes in the first year following implementation of GST, brokerage house Morgan Stanley wrote in its note to clients. The current rate of taxation on cigarettes is around 64 percent, Morgan Stanley added.

The ITC stock may see a sharp re-rating now that clarity has emerged on the tax rates under GST, Credit Suisse wrote in its note to clients.

Here’s more from what brokerages had to say:

Morgan Stanley On ITC

• Rating: Maintains ‘outperform’
• Target price: Rs 310 per share

Morgan Stanley expects ITC stock to do well in the near future, since the market was factoring in higher tax rates under the GST regime. The better-than-expected cigarette volume growth that the company posted in the July to September quarter is also a source of optimism, the brokerage added.

However the implementation of the cess in an ad-valorem manner may hinder the company’s ability to hike prices, Morgan Stanley said. Adverse policies on cigarette consumption and a sluggish fast moving consumer goods business were some of the other negatives highlighted in the report.

The brokerage house sees a 29 percent upside for the stock from the current market price. It maintains an ‘outperform’ rating, with a price target of Rs 310.

Credit Suisse On ITC

• Rating: Maintains ‘outperform’
• Target Price: Rs 300

Credit Suisse expects the implementation of the four-tier tax structure to be beneficial for consumer goods companies. FMCG products, which currently face a tax rate of 25-27 percent, will come in the 18 percent slab under GST, according to the brokerage.

Credit Suisse notes that ITC has been trading at a discount to most of its FMCG peers due to the GST overhang, and that the stock may see a sharp re-rating now that clarity has emerged on the subject. ITC’s discount to Hindustan Unilever Ltd. was at a ten-year high of 30 percent.

Credit Suisse has raised the price target for the ITC stock to Rs 300, which is a 25 percent upside from the current market price even as it maintained its ‘outperform’ rating.

Shares of ITC were trading 4.2 percent higher at Rs 250 as of 1:30 p.m.