ITC stock has reached a new high.
ITC had increased the prices of cigarette brands by 10-20 per cent in 2020 when the NCCD was hiked last.
ITC shares at lifetime high: Shares of FMCG major ITC Ltd rose 6.5 per cent to hit a 52-week high on Thursday. Shares gained after Finance Minister Nirmala Sitharaman’s arrival budget 2023 The speech announced a 16 per cent increase in the duty on cigarettes, meaning that the total tax burden on cigarettes increased by 2–2.5 per cent.
Brokerage believes that the proposed tax hike on cigarettes in union budget 2023 Not much and it will be easily passed through through small price increases.
Nuwama estimates that cigarette companies may only need to pass on a low single-digit increase of around 2-3 per cent. It added that this is not an issue as no increase in prices has been passed on to consumers in the last 2-3 years and hence it will be absorbed by the consumers.
ITC had increased the prices of cigarette brands by 10-20 per cent in 2020 when the NCCD was hiked last.
The stock is witnessing strong traction in the last one year as it has outperformed its sectoral index BSE FMCG and benchmark index Sensex.
ITC is one of the largest cigarette manufacturing companies in the country; The cigarette segment accounts for more than 40 per cent of ITC’s total business.
According to estimates by brokerage firm Kotak Institutional Equities, although ITC’s non-cigarette businesses have shown healthy growth over the past few years, cigarettes contribute 77 per cent to EBIT and 55 per cent to valuation.
However, brokerage firms are not worried about the company’s prospects as they feel the tax hike is marginal.
“The modest tax hike, and that too after a gap of three years (last two tax hikes in February 2020 and July 2017), should allow for steady volume-led revenue growth and associated growth in tax revenue – a win-win overall.” position for ITC and the government,” Kotak Institutional Equities said.
Kotak believes ITC has headroom for price hikes to offset higher taxes, improve net realization and play portfolio strategy to drive share gains.
Kotak said clarity on taxes also removes overhang on the stock and improves visibility of earnings.
“A well-defined, predictable taxation policy and moderate tax increases should improve income visibility; Kotak said, this year’s budget is a step in that direction.
The brokerage firm has an ‘Add’ call on the stock and has raised the target price to Rs 400 from Rs 380. This is expected to drive ITC’s cigarette revenue growth of 6-7 per cent and EBIT growth of 8-9 per cent in FY24.
Brokerage firm JM Financial said the tax hike in the Budget is very modest and ITC may offset the entire impact through about 1-1.5 per cent price hike at the portfolio level.
JM Financial has a buy rating on the stock and raised the target price to Rs 440 from Rs 395.
“We are encouraged by the fact that it is now quite clear that the government is better able to appreciate the legal industry argument that a punitive taxation regime only on legal cigarettes does not help control tobacco use in the country, but rather Rather it causes. Migration from tax-paid cigarettes to illegal channels. This will clearly drive a re-rating of ITC stock in our view,” JM Financial said.
“We have long reiterated that the government’s increasingly rational stance on tobacco taxation will be one of the key value drivers for the stock; The brokerage firm said we are now raising our target target to 25x from 23x given what we see a more supportive policy environment – ITC remains one of our favorite consumer picks.
ITC shares have gained over 85 per cent from the 52-week low of Rs 207 touched on February 24, 2022.
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