Smoking Hot! Brokerages upbeat on ITC as excise on cigarettes scrapped; stock up 9%

ITC gained over 9 percent intraday on Monday post developments around taxation on cigarettes.

The Central Board of Excise and Customs (CBEC), over the weekend, removed excise and additional excise duty on cigarettes, while the National Calamity Contingent continued to remain.

Brokerage houses largely see this move as a positive for the stock and see more upside for it. They believe that this could translate into better volume growth and give the company a window to roll out low cost cigarette models and gain market share.

Moneycontrol takes a look at what major global brokerages are talking about the stock.

The global financial services firm highlighted the development of Central Board of Excise and Customs (CBEC) removing excise and additional excise duty on cigarettes, while National Calamity Contingent Duty (NCCD) stayed. The firm believes that this development could result in lower tax incidence on cigarettes by 6 percent. Meanwhile, bidis will face rise in taxes and hence there could be more working capital needs and compliance cost. Further, BofA-ML sees potential for 50 percent price hikes by the company based on channel checks.

The brokerage firm sees ITC getting back to high teens earnings trajectory as tailwind on the back of GST is confirmed. It expects FY18 cigarette sales to grow over 15 percent with 8-10 percent increase in realisations from GST. It also foresees operating estimates increasing 5-6 percent, while earnings CAGR moves from 14 percent to over 17 percent.

Morgan Stanley said that its calculations suggest that there could be an over 4 percent reduction in cigarette taxes and offer 2 percent price flexibility for the company. Having said that, the tax incidence on the supply chain under GST would rise. It sees the stock to react positively based on the taxation development.

Deutsche Bank expects the stock to rally in the near term as uncertainty around taxes in transition to GST is over now. This predictability could now drive volume growth and better mix management, the research firm wrote in its report. Further, it said that an opportunity to launch lower-priced cigarette could drive growth in the organised sector.

Macquarie has increased FY18/19 earnings by 5 percent. The company is the top pick in the Indian consumer sector for the research firm. In fact, it is a Macquarie marquee recommended stock.

CLSA too said that the tax reduction was a positive sign for the company. Having said that, anti-profiteering rules could apply and that the company will have to cut cigarette prices.

Post the tax reduction, the research firm sees upside risks to cigarette EBIT growth.

The stock gained over 12 percent in the past one month, while its three-day gain stood at 14 percent. At 09:15 hrs ITC was quoting at Rs 349.80, up Rs 25.95, or 8.01 percent on the BSE. It touched a 52-week high of Rs 352.65.