ITC shares climb 3% after two-day drubbing on value buying

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After suffering deep losses in the last two sessions, share price of ITC rose about 3 percent on BSE in the morning trade on February 4.

In the last two sessions, the stock retreated by almost 12 percent as investors went on a selling spree after the Union Budget proposed to raise excise duty on tobacco and cigarettes.

ITC is India’s largest cigarette-maker and brokerages say the duty hike will dent sales volume of the company.

"If the cess on cigarettes is increased, it would affect sales volumes of ITC’s cigarette business as the company will pass on the increase in rate to consumers through price hikes," KR Choksey had said in its Budget expectations report.

Analysts attributed the rise in the stock as value-buying and said all was not lost for the heavyweight stock.

Some brokerages maintained their buy recommendation on the stock but with a reduced target price.

"In view of the concerns on volume in the short term, we slightly tweaked our earnings per share (EPS) forecast of FY21E and FY22E. Also, we are lowering the target PE multiple to 23 times from 27 times earlier. Consequently, our target price stands revised to Rs 341. We maintain buy recommendation on the stock," brokerage firm Antique Stock Broking said in a report on February 3.

Investec has maintained a buy call but cut the target to Rs 259 from Rs 290 per share.

“It is the first sizeable increase in taxes on cigarettes since July 2017 and we expect the company to raise prices by over 6-7 percent,” it said.

The research house cut EBITDA estimates by 3.7/5.6 percent for FY21/22, cut cigarette volume & EBIT growth assumptions from 4 percent to 2 percent for FY21/22, while maintaining buy due to decadal low valuations.

JPMorgan downgraded the stock to neutral from overweight and cut target to Rs 235.

The tax hike would impact volume growth and weigh on stock multiples. The strong economic franchise makes it attractive at 5-7 percent potential downside, said JP Morgan.

With NCCD hike, tax incidence is 10 percent higher versus pre-budget levels and expect higher price increase to drive positive EBIT growth, it said.

It forecasted a 12 percent price hike over FY21 to deliver cigarette EBIT growth of 5 percent and lower FY21/22E EPS estimates by 3 percent. Also, EBIT growth forecast lowered to 5 percent in FY21.

At 1055 hours, ITC was quoting at Rs 213.55, up 2.82 percent, on the BSE.

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