ITC tanks again: Is it best to sell now post excise hike?

CLSA suggest selling the stock with a target price of Rs 330 per share and cuts earnings per share (EPS) estimates by 5-10 percent over FY16-17. It also warns that the stock may even go down to Rs 290 per share in the near-term. The brokerage has downgraded the stock to sell after seven years of positive stance due to government’s hawkish stance on cigarettes. CLSA says that ITC's cigarette volume may see a decline of 5 percent in FY16 and flat volumes in FY17.

JP Morgan has also downgraded the stock to neutral from overweight with a revised target of Rs 370 per share. The firm explains that ITC's strong economic franchise makes it attractive at 5-7 percent downside from here for long-term investors and hence not an underweight rating. According to JP Morgan, while excise impact will be passed on, it would impact volume growth and weigh on stock multiples, restricting stock upside from current levels over next 6-12 months.

"Given three consecutive years of sharp price increases, cigarette demand inelasticity has been impacted and a similar increase this year will likely further discourage off take. We now forecast a volume decline of 8 percent in FY16," the brokerage says in a note.

CIMB expects the stock to remain under pressure in the near-term but see a favourable risk-reward below the Rs 350-levels from a 12-18 month perspective. "While the stock lacks near-term triggers, we recommend investors accumulate the stock in the current weakness given the favourable risk-reward over the next 12-18 months," it says.

However, it has lowered cigarette EBIT CAGR to 13 percent over FY15-17 with a target price of Rs 385 per share. It expects ITC to take 15 percent price hikes in cigarettes in FY16 resulting in a 3-4 percent volume decline year-on-year post a sharp 10 percent volume decline expected inFY15.

Meanwhile, Deutsche Bank still has a buy rating on ITC with a reduced target price of Rs 400 per share. Though it feels ITC’s volumes may decline 10 percent in FY16 and is worried about  short-term headwinds but relative valuations make it an attractive buying.

Deutsche Bank has, however, cut forecast earnings growth to 9.4 percent in FY15-17. "Maintaining volumes could be challenging for cigarette industry as 64 mm was essentially helping them to retain the price sensitive consumer. The competitive activity levels in the industry could reduce as competitors VST and Godfrey Phillip will likely have lesser portfolio maneuverability," it explains in a note.

Slow growth in cigarette business had impacted overall revenue growth of the company in December quarter. Cigarettes revenue rose 0.6 percent year-on-year to Rs 4,142 crore dented by price hikes, excise duty and recent increase in the VAT rate in key states (Tamil Nadu, Kerala, Assam).

The FMCG major’s profit grew 10.5 percent year-on-year to Rs 2,635 crore as against expected growth of 12.6 percent. Other income, which surged 48.85 percent on yearly basis to Rs 582 crore, supported the bottomline in Q3. Net sales rose 2.5 percent to Rs 8,942 crore in the quarter ended December 2014 from Rs 8,727 crore in the year-ago period

At 09:53 hrs ITC was quoting at Rs 352.25, down Rs 9.00, or 2.49 percent on the BSE.

(Posted by Nasrin Sultana)