ITC: Cigarette Price Rise Pushes ITC Up in Analyst Buyers Charts
Even as mass-market companies are under the impact of demonetization, the ITC raised the rates of two of its mid-range cigarettes by as much as 15% last week. While the move is supposed to be in anticipation of an increase in cigarette taxes in the next budget, it also strengthens the company’s high pricing power, which can be harnessed during tough times.
ITC stock closed 2016 with a 10% gain from the 2.3% marginal increase in the ET FMCG index and a similar rise in Sensex. His peer
lost 4% of its value on the stock exchanges. The company’s cigarettes business has shown encouraging performance over the past two quarters. The next budget foresees an element of uncertainty regarding the increase in excise duties on cigarettes.
Historically, however, budgets have not turned out to be negative for the stock. An analysis of the evolution of ITC actions before the budget, and on the day of its presentation, shows that preparing the budget offers a good opportunity to invest in the action. On all budgets since 2001, ITC’s stock has closed positively or flat in 12 years. Even in the four years it ended in the red on Budget Day, the return to pre-budget levels has been swift.
According to a latest FMCG sector report from Elara Capital (which recently raised its recommendation on ITC from neutral to outperforming), cigarette sales are expected to post one of the fastest recoveries in trade, with increased circulation of lower value tickets.
The report also estimated that the total GST tax rate (demerit rate + additional tax) for the legal cigarette industry would not exceed the total tax outflow in terms of VAT and tax. excise as it is today – assuming the additional tax on top of the GST rate will replace the current excise tax and be increased by around 10% per year.
Falling valuations is another reason the street is bullish on the stock. Trading at 29 times after four quarters of earnings, it is the cheapest among frontline FMCG stocks – it is at 15% off its all-time high of Rs 271. It will be interesting to see if the stock will be able to beat it. the all-time high, given that the upcoming budget and the company’s third quarter performance may contain bullish sentiment.