There's no stopping diversified conglomerate ITC's bull run. The stock is only 3 percent away from the Rs 400 mark and is trading at an all-time high.
And, that too after taking a beating a day earlier after finance minister Nirmala Sitharaman in her Budget for 2023-24 announced a hike in National Calamity Contingent (NCCD) duty, only to recover swiftly and close in green.
At 12.15 pm on February 2, the stock was quoting at Rs 381.30 apiece on the NSE, up 5.51 percent amid heavy volumes of 34.6 million shares. Earlier in the day, it had hit an all-time high of Rs 384.70 apiece.
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The stock corrected 6 percent as Sitharaman said the NCCD duty on cigarettes was hiked by 16 percent. The reaction was overdone as the Street soon realised that the total tax component on a cigarette stick goes up by only 1-2 percent, said analysts.
The NCCD is a part of the total tax levied on cigarettes. The total tax burden (taxes as a percentage of final tax inclusive retail price) is about 52.7 percent for cigarettes, which includes GST, excise duty as well as NCCD. NCCD is about 10 percent of the overall tax.
The World Health Organization recommends a total tax of 75 percent on tobacco products.
According to Nuvama Institutional Equities, "The tax increase is lower than Street’s/ours expectations, and we expect legal cigarette players to gain share from the illegal ones." This means higher volumes for ITC.
Cigarette companies will need to raise prices by 2-3 percent, which is not a big ask and can be easily passed on, analysts said.
Analysts at JM Financial believe the move can re-rate the stock further. "We expect ITC to accordingly adopt an approach that could also drive its premiumisation agenda and further increase its relative positioning in the industry," the brokerage firm said in a report.
It has upped its target multiple on the stock from 23x to 25x price-to-earnings ratio. Nuvama, too, has increased earnings per share (EPS) estimate for FY24 and FY25 by 4 percent each with target price of Rs 450.
After taking a hit during COVID lockdown, cigarette volume growth has been in low double-digits for ITC over the past few quarters. The company derives about 40-45 percent of its topline from this segment, while the rest comes from FMCG, paper and agri divisions.
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