Shares of diversified FMCG player ITC closed 4.74 percent higher at ₹378.60 after jumping 6.4 percent in intraday trade to hit their fresh all-time high of ₹384.50 on BSE on February 2.
The stock jumped higher eve after Finance Minister Nirmala Sithraman in her Budget 2023 speech announced a hike in duty on cigarettes by 16 percent, implying a 2-2.5 percent increase in overall tax incidence on cigarettes.
The stock has been witnessing strong traction in the last one year as it has significantly outperformed its sectoral index BSE FMCG and the benchmark index Sensex.
ITC is one of the biggest cigarette makers in the country; over 40 percent of the total business for ITC comes from the cigarette segment.
As per brokerage firm Kotak Institutional Equities estimates, although ITC’s non-cigarette businesses have scaled up well in the past few years, cigarettes contribute 77 percent to EBIT and 55 percent to valuations.
However, brokerage firms are not worried about the prospects of the company as they find the tax increase a modest one.
"The modest tax increase, and that too after a gap of three years (the last two tax increases in February 2020 and July 2017), should allow steady volume-led revenue growth and associated growth in tax revenues - overall a win-win situation for ITC and the government," said Kotak Institutional Equities.
Kotak believes ITC has headroom for price increases to offset higher taxes, improve net realization and play portfolio strategy to drive share gains.
Kotak added that the clarity on taxes also removes the overhang on the stock and improves earnings visibility.
"A well-defined, predictable taxation policy and moderate tax increases should improve earnings visibility; this year’s budget is a step in that direction," said Kotak.
The brokerage firm has an 'add' call on the stock and raised the target price to ₹400 from ₹380. It expects ITC's cigarette revenue growth of 6-7 percent and EBIT growth of 8-9 percent in FY24.
Brokerage firm JM Financial said the tax hike in the Budget is very marginal and ITC could offset the entire impact through a blended nearly 1-1.5 percent price hike at the portfolio level.
JM Financial maintained a buy call on the stock and raised the target price to ₹440 from ₹395.
"We are encouraged by the fact that it is now quite evident that the government is able to better appreciate the legal industry’s logic that a punitive taxation regime on legal cigarettes alone does not necessarily help control the use of tobacco in the country, but instead causes migration out of tax-paid cigarettes into illegal channels. This should evidently drive a further re-rating of the ITC stock, in our view," said JM Financial.
"We have for long reiterated that the government’s increasingly logical stance on tobacco taxation would be one of the key value drivers for the stock; we now up our target multiple from 23 times to 25 times to reflect what appears to us to be a more supportive policy environment -ITC continues to be one of our favoured consumer picks," the brokerage firm added.
Naveen Mishra, Senior Research Analyst - Equity Research at CapitalVia Global Research sees a different angle behind the stock's gains.
"Finance Minister also made a specific note of the Indian tourism industry, saying that the tourism promotion in India will be taken up on a large scale. ITC is also engaged in the hotel industry; it manages more than 115 hotels in various locations. The Budget announcement boosted the stock price of ITC and now it has hit the fresh all time high," said Mishra.
However, technical analysts point out indicators which are flashing red for the stock.
Jigar S. Patel, Senior Manager - Equity Research, Anand Rathi Share and Stock Brokers pointed out that though ITC is looking lucrative at the current juncture, one needs to pay attention to the short-term return of 18 percent (in the Last month's time) which is very unusual for ITC.
Patel added that on a daily scale, ITC has formed a bearish crab pattern which is a matter of concern. Daily MACD is overstretched while daily RSI is highly overbought nearly at 83 level, hinting at a possible profit-booking in the coming few sessions.
"One needs to book a profit between ₹378-385 (if again tested). No fresh buy is recommended at the current market price," said Patel.
ITC will release its Q3FY23 earnings on February 3, 2023.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.
