Moneycontrol
Last Updated : Feb 01, 2018 05:55 PM IST | Source: Moneycontrol.com

Unchanged cigarette taxation sparks a relief rally in ITC; stock ends 2% higher

The stock ended around 2 percent higher after gaining over 6 percent intraday.

 
 
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Shareholders of ITC were a happy bunch as they cheered the fact that there was no announcement on the taxation front on cigarettes. The stock ended around 2 percent higher after gaining over 6 percent intraday.

The Street was probably factoring in a tinkering in taxation for cigarettes, either through an increase in NCCD or an imposition of new tax.

“This comes as a big relief to cigarette companies who have seen cumulative growth in tax incidence on cigarettes at a staggering 202% since 2011-12, i.e. the last 6 years. This will also mean that the thesis of shift from illegal cigarette to legal cigarette shall get a fillip,” Edelweiss said in a report.

The broking firm added that the status quo is rather a relief for the stock. It is maintaining a hold call on the stock at the current market price and expects it to continue to re-rate due to improving prospects of ITC’s other businesses.

It also highlighted that over the past decade, contribution of cigarettes to ITC’s overall revenue has plummeted and it is expected to accentuate as other businesses mature (FMCG business has reached EBIT margin of 1.6% against average of flat EBIT over past 6 quarters) and attain size & scale.

“While stock prices of other listed FMCG, hotels and paper stocks have risen 35-140%, street is yet to re-rate ITC’s other businesses,” it said in a report.

With per capita consumption 1/18th of China’s, cigarette opportunity in India remains attractive over the long term.

“However, with cigarette still contributing 85% to EBIT, reliance on regulated business continues to remain high,” the report added.

The rally in the stock also provided a filip to the Nifty FMCG index as well. The index gained over 3 percent before settling with gains of 1 percent.
First Published on Feb 1, 2018 05:55 pm
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