It’s All About Taxes For ITC, Say Brokerages 

ITC Ltd.’s cigarette volumes may decline further if the government implements another tax hike, according to brokerages.

The cigarette segment, which contributes half of ITC’s revenue, is under “tremendous pressure from sharp increase in taxes over the last few quarters,” the company said in a statement on Friday. Demand for fast moving consumer goods remains sluggish after the Goods and Services Tax disrupted the distribution channel, ITC added.

Jefferies upgraded the stock to 'Buy' from 'Hold' even as it highlighted potential tax hikes as a downside risk. Kotak Institutional Equities cut the target price to Rs 310 from Rs 340 earlier and reduced its earnings per share forecast. 32 of the 40 analysts who track the ITC have a 'Buy' rating on the stock, according to Bloomberg. The consensus 12-month price target stands at Rs 320.8, which indicates an upside of 20 percent from the current level.

Brokerages also noted the effect of highway liquor ban on the “subdued” performance of the ITC range of hotels across the country.

Also Read: ITC’s Volumes To Improve In Coming Quarters, Says Food Division CEO

Here’s what the brokerages had to say about ITC:

Edelweiss

• Six percent dip in the net profit was in-line with Edelweiss' estimates
• Tax hike because of GST may affect cigarette volumes in the future
• Maintains 'Hold' with a target price of Rs 307 per share
• Cigarette opportunity in India remains attractive over the long term
• Hotels remain affected due to highway liquor ban

Kotak Institutional Equities

• Maintains 'Add' with target price revised to Rs 310 from Rs 340
• Decline in cigarette volumes, lower net realisation and GST transitory shock are reasons for ITC's below expectations performance
• Net sales of Rs 10,300 was in-line with expectations although net profit was below expectation
• Cut earnings per share forecast for financial years 2018 till 2020 by 2-3 percent
• Performance in hotels segment “subdued”

UBS

• Rating at 'Buy' with a target price of Rs 350
• At UBS' price target, ITC will trade at 31.8 times the one-year forward price to earnings ratio
• Lower volatility in tax changes going forward, a unified market and portfolio strength may enable better operational visibility
• Cigarette volumes may have come down but the mix improved as micro-filter volumes declined less and regular sized ones have come down more than 10 percent
• Improvement in volumes should come through in the second half of the current fiscal as consumers adjust to new price points
• Cigarette cess could mean that the budgetary tax on cigarettes is done away with this year, which could improve volume outlook further into next financial year

Also Read: ITC’s Margin Contracts, Says Demand Remains Sluggish After GST

Jefferies

• Target price remains the same at Rs 305 but the stock has been upgraded to 'Buy' from 'Hold'
• Expect gradual recovery in ITC cigarette volumes with better recovery in other businesses
• Risk reward for ITC is turning favourable with limited downside
• A downside risk would be another "irrational" hike in cigarettes taxes

Macquarie

• Maintains 'Neutral' with a target price of Rs 304
• Significant part of the 64 mm segment is now priced at more than Rs 5 per stick, which is contributing to volume pressure
• Illegal cigarettes and Bidi will continue to thrive with a rising price differential with cigarettes
• A steep increase in prices of the 84 mm and 69 mm is leading to significant downtrading to the 64 mm segment
• Significant deterioration in cigarette mix will limit the realisation growth for the company

The ITC stock fell 0.84 percent to Rs 267 apiece in intra-day trading. It has gained as much as 10.8 percent this year, although, it is lesser than the benchmark BSE S&P Sensex’s 24.96 percent rise in 2017.