Why ITC could be one of the bigger beneficiaries of the GST era
As the uncertainty over GST taxation ebbs and rural recovery gathers momentum, ITC could finally be expected to see the much awaited multiple re-rating.
On expected lines, FMCG reacted positively as the government announced goods and services tax (GST) rates for most consumer goods post the GST Council meeting. While there has been an industry-wide positive reaction, the announcement on the filter cigarettes category brings relief to ITC by putting an end to the uncertainty around taxation. ITC is now set to be one of the bigger beneficiaries in the GST era.
GST product rates and cess announcements remove not only a lingering uncertainty over taxation of tobacco products, but also a big relief for ITC as the rates announced are broadly tax neutral for its cigarettes division (63 percent of revenues). The cess announced is way off from the capped case scenario of Rs 4,170/1,000 cigarettes sticks plus 290 percent ad-valorem.
In fact from the total tax incidence point of view, if we take cess rates announced into consideration, it is a net positive for ITC's portfolio. Consider the following example of the pre-GST set up with VAT at 25 percent. Blended tax rate comes out to be 52 percent.
However, if one includes the new GST rate (28 percent) and the cess (specific + 5 percent), blended tax rate reduces to 47 percent.
With the available information that we have, it’s likely that the tax incidence should in any case not increase from the present levels for ITC. We are not aware of any other ad-valorem rate/adjusting rate which needs to be considered.
Additionally, the FMCG major gets 35 percent revenue from the other FMCG categories including that of agribusiness, wherein the GST rates for most of the categories are 18 percent or less.
From the valuation perspective, ITC is the cheapest stock in the FMCG universe. ITC is trading at the PE multiple of 34 times earnings of 2016-17 - at a steep discount of 31 percent compared to its nearest FMCG peer HUL (five-year average multiple discount is 24 percent).Decoding GSTAs the uncertainty over GST taxation ebbs and rural recovery gathers momentum, ITC could finally be expected to see the much awaited multiple re-rating.