According to Citi, which also maintained buy rating on the stock with a target price of Rs 380, ITC is a key holding in the consumer space. It trades at a discount of around 25-30 percent to the consumer staples sector.
ITC shares gained more than 3 percent intraday Thursday as research houses remained bullish on the stock, expecting it to gain up to 27 percent over a period of one year.
While retaining buy call with a target price of Rs 417, CLSA said channel checks indicated that ITC has cut cigarette prices for key brands by 1-2 percent in states with high VAT.
So, prices in states such as Maharashtra, Tamil Nadu and Gujarat, which had high VAT, are now down to the same level as those in Delhi (which had a lower VAT), signalling uniform pricing across India.
"On the face of it these appear to be cuts but we see these as mere adjustments as ITC is moving towards uniform prices for its brands," CLSA said.
The price revisions also signal that further cuts are less likely now, according to the research firm.
It feels no price cut would boost FY18 earnings but it will revisit earnings estimates post-Q1FY18 results given lack of clarity on GST rollout for the quarter ahead.
CLSA explained the difference of cigarette pricing before and after GST:
According to Citi, which also maintained buy rating on the stock with increased target price at Rs 380 (from Rs 355), ITC is a key holding in the consumer space. It trades at a discount of around 25-30 percent to the consumer staples sector.
"Legislative headwinds have receded and we forecast around 15 percent EBITDA CAGR over FY17-20 on volume growth and with capex of around Rs 3,000 crore per annum, free cash flow CAGR should be more than 20 percent. We think this should drive a re-rating of the stock," it explained.
Citi expects volumes to grow at 3.5-4 percent over the next 3 years, predicated on expectations of a more rational legislative regime.
FY17 saw cigarette volumes growing around 1.5 percent after a cumulative around 20 percent decline over 3 years.
Tobacco is relatively oligopolistic in most large Asian markets. ITC stands out with both solid market share, and with the top 3 brands accounting for 65 percent volume share.
Other than cigarette, the 2017 annual report provides plenty of color and food-for-thought. ITC's non cigarette FMCG business has crossed Rs 10,000 crore in revenues; around 75 percent of this is food & beverages, with strong market shares in noodles (No. 2 behind Nestle), biscuits (No. 3), confectionery (No. 2) and snacks (No. 2), Citi said.
Key risks, according to the research house, are 1) mix doesn’t improve as per expectations; and b) volume growth is softer than forecast.
At 15:07 hours IST, the stock price was quoting at Rs 338.80, up Rs 10.10, or 3.07 percent on the BSE.Posted by Sunil Shankar Matkar