Hold ITC; target of Rs 304: Edelweiss Securities

Edelweiss Securities' research report on ITC

In a negative surprise, the GST Council on Monday stepped in to check the windfall being reaped by cigarette manufacturers and increased effective tax under GST by ~10-11% which will result in MRP increase of ~8-9%. This with 6% hike in the Budget 2017-18 amounts to ~16-17% total hike in taxes for FY18. So, why was this unexpected? The Budget had sprung a positive surprise with mere 6% tax hike (lowest hike in past 6 years) coupled with relatively softer stance in earlier GST. In the past (FY13-16), when the hike in tax was ~18% on an average, ITC’s volumes declined by ~20% over the period. Accordingly, we cut our cigarette volume estimates for FY18/19 to 5% / 2% YoY decline versus 5%/5% YoY growth, respectively. Ergo, we cut EPS estimates by 5.6%/8.2% YoY for FY18/19 respectively and cigarette business multiple to 27x (30x earlier). We downgrade to ‘HOLD’.

Outlook
We cut our volume assumptions for FY18E and FY19E to a decline of 5% YoY and 2% YoY respectively and hence cut our EPS estimates by 5.6%/8.2% YoY for FY18/19 respectively. We downgrade to ‘HOLD/ Sector Performer’ from ‘BUY/Sector outformer’. We value ITC on SoTP basis on FY19E and arrive at a target price of INR304. For all recommendations report, click here

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