ITC Faces Barrage Of Downgrades After Short-Lived GST Benefit

ITC Ltd. has fallen out of favour with brokerage firms after it become evident that cigarette prices will not come down under the Goods and Services Tax regime. The stock fell as much as 15 percent in opening trade, set for its biggest decline since May 1992.

The GST Council on Monday, increased the compensation cess on cigarettes to ensure that the effective tax rate does not reduce under the new indirect tax regime.

Following the news, India’s biggest cigarette maker was downgraded by global brokerage houses CLSA, Credit Suisse and Morgan Stanley anticipating weaker earnings.

Here’s what they had to say.

CLSA

• Stock Rating: Downgraded to ‘Sell’ From ‘Buy’
• Target Price: Cut to Rs 285 from Rs 417
• Estimate 10 percent hike in taxes from pre-GST levels
• Foresee a minimum 5 percent price hike in order to maintain net realisations
• Higher price hike would be required to grow earnings, which may also impact volumes
• Cut earnings per share (EPS) estimates by 6-10 percent
• Lowered cigarette EBIT forecast to mid-single digits

Credit Suisse

• Stock Rating: Downgraded to ‘Neutral ’ from ‘Outperform’
• Target Price: Cut to Rs 310 from Rs 400
• Cigarette taxes were down 7-9 percent post GST, whereas now there is an increase of 7-10 percent
• Price hike of 8-9 percent will lead to decline in volumes
• Government's relatively moderate stance on cigarette taxation comes into question
• Cut FY18-20 estimates by 10-12 percent
• Stock to continue facing pressure on earnings progressively
• Tax hikes in next year's annual budget will be the next trigger

Morgan Stanley

• Stock Rating: Downgraded to ‘Equal-weight’ From ‘Overweight’
• Target Price: Cut to Rs 285 from Rs 395
• ITC will need 12-13 percent weighted average cigarette price hike hereon with around 20 percent price increase in the King Size Filter Tip segment to offset the tax increase
• Forecasts 3 percent volume decline in FY18
• Assume flat taxes, flat volumes and 13 percent increase in cigarette EBIT for FY19
• Near-term valuation re-rating or de-rating linked to visibility of cigarette volume growth
• Estimate EBIT CAGR of 15 percent for non-cigarette business during FY17-19
• Competitive intensity may increase given that this is the first instance of a disproportionate tax increase in King Size segment