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Last Updated : May 25, 2015 01:13 PM IST | Source: Moneycontrol.com

ITC slips 3%; analysts say cigarette vol pressure to remain

Credit Suisse maintains underperform rating on the stock with a reduced target of Rs 310 per share. The brokerage expects ITC to underperform till the next Budget, only then the street will get a sense of government's taxation approach.

 
 
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Moneycontrol Bureau


Shares of ITC slipped 3 percent intraday on Monday after its March quarter earnings were disappointing in all parameters. Analysts have slashed target price and FY16 earning estimates on concerns that cigarette volume may continue to remain under pressure for few more quarters.


Credit Suisse maintains underperform rating on the stock with a reduced target of Rs 310 per share. The brokerage expects ITC to underperform till the next Budget, only then the street will get a sense of government's taxation approach. It has also slashed earnings estimates by 2 percent stating that Q4 performance does not augur well for H1FY16 volumes, when additional 12-13 percent price hikes hit the market. The March quarter earnings were the weakest in many years as cigarette business suffered a volume shock for second consecutive quarter.

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On Friday after market hours, ITC announced its Q4 results with net profit at Rs 2361 crore in the March quarter from Rs 2278 crore in corresponding quarter last fiscal. It total income, during the quarter, was at Rs 9,293 crore against Rs 9,238.5 crore in the year-ago period.


Its cigarettes revenue grew to Rs 4,210.7 crore from Rs 4,079 crore (YoY) with EBIT margin at 64.3 percent against 62.6 percent (Y-o-Y). ITC sells brands like Gold Flake, Classic and India Kings.


Meanwhile, CLSA retains sell on the stock with a revised target price of Rs 310. It see no respite for ITC during H1FY16 as volumes are likely to remain under pressure and says that base will also be tough during this period. It expects a 15 percent annual volume drop in first half of FY16 and slahes FY16-17 earnings per share (EPS) estimates by 2-3 percent.


Barclays has an equalweight with a lower target priced of Rs 330. Terming the double-digit cigarette volume decline 'unsurprising', it says margins were further impacted by an adverse product mix and weak trends in non-FMCG segments. According to the brokerage, although H2FY16 may benefit by a significantly negative weak base, its near-term earnings will remain challenged on high taxes and weak demand. Full fledged recovery in FMCG, others business is likely to be two quarters away, it adds.


With a neutral rating, JP Morgan has revised target price on ITC to Rs 360 and reduced FY16/17 EPS estimates by 3 percent. It feels uncertainties related to cigarette demand elasticity and earnings after four consecutive years of high taxation may continue to weigh on stock multiples in the near term.


However, Macquaire is bullish on the stock with an outperform rating. It has target price of Rs 395 and expects ITC to deliver 14 percent growth in cigarette EBIT despite volume declines. It has cut FY16/17e EPS by 5-7 percent on lower cigarette volume assumptions.


Even Kotak rates it add but slashed target price to Rs 360. "Price hikes driven by sustained taxation pressure in past few years have started impacting volumes materially Prognosis for FY16 is also not too encouraging, FY16 could be weaker than FY15," it says in a report. Though it sees no visible upgrade triggers, the brokerage is betting on it due to relatively inexpensive valuations – which remains the only positive. ITC trades at 30 percent discount to the rest of the FMCG sector on FY16 price to equity ratio.


At 09:32 hrs the stock was at Rs 319.90, down Rs 8.55, or 2.60 percent on the BSE.


Posted by Nasrin Sultana



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First Published on May 25, 2015 10:05 am
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