Moneycontrol Bureau
Jubilant investors are hurriedly buying shares of ITC as brokerages are bullish on the stock. Shares of ITC surged 10 percent intraday on Tuesday. In his Budget proposal for FY17, Finance Minister Arun Jaitley hiked excise duty on cigarettes to 10-15 percent but that has not deterred any sentiment. The magnitude of excise increase for cigarettes is not as steep as compared to prior excise hikes.
Credit Suisse has upgraded the stock to outperform with an increased target price of Rs 370 from Rs 298 per share. It says that quantum of excise hike is a relief as compared to previous years. Stating that the company's valuation is attractive at 19 times FY18 earnings, it expects ITC EBIT growth to return to double digits.
Morgan Stanley also overweight rating with a target price of Rs 400 per share. It says that ITC will need 4-5 percent price hike to offset increase in excise. This is the fifth consecutive year of excise hike and ITC has passed on excise hike by way of gradual price hikes in the past. In FY15-16, excise duty was hiked 25 percent in cigarette lengths less than 65mm and 15 percent increased for lengths over 65 mm. However, Morgan Stanley sees a 13-14 percent retail price hike in FY17 and a volume growth of 6 percent.
Deutsche Bank has a target price of Rs 400 per share, expecting an 11 percent earnings growth for FY1. However, it still feels ITC's volume may be still capped due to high prices.
ICICIdirect has a buy rating with a target of Rs 387 per share. It believes a 5-6 percent price hike is likely. "We have modelled volume de-growth of 3 percent each for FY17 & FY18 and price increase of 10 percent each for FY17 & FY18. We expect net sales CAGR of 9 percent & earnings CAGR of 8.6 percent in FY15-18," it says in a report.
Edelweiss feels the excise duty hike will have a negative bearing on ITC’s cigarette volumes. It expects 6-7 percent decline in cigarettes volume in FY17 versus 10 percent decline witnessed in FY16when weighted average excise hike was 13 percent. It expects ITC to hike cigarette price by 7-8 percent in select packs. ITC has already seen 11 consecutive quarters of volume fall. "Various rural initiatives announced in the Budget augur well for overall rural consumption which has tapered off in the recent past," it says.
ITC’s key product tobacco-based items mainly cigarette sales volume saw a moderate decline in December quarter to 4.5 percent after four quarters of double digit declines. ITC’s cigarette sales volume has fallen over 20 percent in the last three years due to steep increases in taxation and subsequent price hikes.
Bank of America Merill Lynch has a buy rating on valutaions. It says that despite higher potential, ITC now prices in a 10-year EBITDA CAGR, similar to that for cigarette firms in mature markets, making valuations compelling.
ITC is the cheapest consumer stock in India and Nestle, HUL and Marico are most expensive. Credit Suisse pegs FY17 PE for ITC at 24 times against HUL at little over 35 times. According to the brokerage, valuation differential between ITC and HUL is the largest in 10 years.
At 12:14 hrs ITC was quoting at Rs 319.90, up Rs 24.10, or 8.15 percent on the BSE.
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