Jefferies upgrades ITC to buy from hold, hikes target price to Rs 585/ share

Jefferies noted that GST taxes are expected to remain stable until March 2026 as the center settles state dues

Jefferies India upgraded ITC Ltd to a buy rating, raising the target price to Rs 585 per share, up 25 percent from the current market price, after tobacco taxes remained unchanged in the 2024 Union Budget presented by Finance Minister Nirmala Sitharaman on July 23. Earnings per share were also increased by 1-2 percent.

Jefferies noted that the Union Budget kept tobacco taxes unchanged, which came as a relief for ITC. The last tobacco tax hike was 2 percent in February 2023. This stability allows ITC to focus on volume with minimal price hikes, Jefferies said.

Jefferies further noted that GST taxes are expected to remain stable until March 2026 as the Centre settles state dues. Improving demand in the staple sector should benefit ITC's key businesses. The February 2025 Budget will be significant, but a modest price hike this year will lay the groundwork for next year.

About 90 percent of cigarette taxes fall under the GST regime (GST rate at 28 percent + compensation cess), earmarked until March 2026, to repay state borrowings, ensuring tax stability for the next 12-18 months.

Jefferies said ITC's cigarette EBIT growth slowed to 4 percent in the second half of FY24 (versus 10 percent in the first half and 21 percent in FY23) due to volume normalisation and input cost inflation.

With clarity on cigarette taxation, ITC is set to boost revenue through volume, price hikes, and better mix. Input cost inflation will ease by the second half of FY25, supporting margin expansion. Jefferies expects cigarette EBIT growth to accelerate from 4 percent YoY in the second half od FY24 to 7 percent in the first half of FY25 and double digits by FY25 end.