- Sharekhan said, recent amendment in the Finance Bill 2023 on tobacco/tobacco products is unlikely to have any material impact on tax rates on cigarettes. Volume growth momentum in the cigarette business is likely to sustain in the quarters ahead.
FMCG major, ITC emerged as the top underperforming stock on Monday. The stock snapped its 2-days gaining spree and plunged by more than 1% on BSE Sensex. ITC has been in focus after the amendments in the finance bill 2023 on tobacco products. However, brokerage Sharekhan expects the taxation amendments may not have any material impact on tax rates on cigarettes. The brokerage believes ITC’s growth prospectus remains intact. Hence, it finds ITC’s stock attractive and has recommended buying.
On BSE, ITC stock closed at ₹378.95 down by 1.2%. Its market cap is nearly ₹4.71 lakh crore.
ITC is the second largest FMCG after HUL in terms of market share. The company is also on the list of the top 10 most valued firms.
In its latest note on ITC, Sharekhan said, “recent amendment in the Finance Bill 2023 on tobacco/tobacco products is unlikely to have any material impact on tax rates on cigarettes. Volume growth momentum in the cigarette business is likely to sustain in the quarters ahead.”
Last month, the government announced that the maximum GST compensation cess rate for pan masala will be 51% of the retail sale price per unit, from the current cess charge of 135% ad valorem. They fixed the rate for tobacco at ₹4,170 per thousand sticks plus 290% ad valorem or 100% of the retail sale price per unit.
This cess is levied over and above the highest GST rate of 28%. It was brought as part of amendments to the Finance Bill 2023.
Sharekhan pointed out that in the recent amendments in the Finance Bill 2023, the maximum compensation cess chargeable on tobacco products is capped at ₹4,170 per 1000 sticks + 290% ad-valorem.
However, ITC is unlikely to be impacted by the same.
The brokerage said, “ITC’s cigarette business is unlikely to be impacted by the same. We expect volume growth momentum in the cigarette business to continue in the quarters ahead.”
As per the brokerage’s note, the company has delivered a resilient performance in the past few quarters, despite an uncertain demand environment and sustained inflationary pressures on margins. The resilient performance was driven by a good recovery in its core cigarette business (in the post-COVID era), steady double-digit growth in the non-cigarette FMCG business, and accelerated growth in the hotel and paperboard, paper, and packaging (PPP) business.
Brokerage’s note added, “ITC is expected to maintain its volume growth momentum in the cigarette business, given no price hikes in the near term and government curbing illicit cigarette sales. Strong growth in the non-cigarette FMCG business, stellar recovery in the hotel business, and sustained growth in the PPP business will drive double-digit revenue and PAT growth over the next two years”
In regards to stock, the brokerage’s note said, it currently trades at 25.5x, 22.8x, and 20.6x its FY2023E, FY2024E, and FY2025E EPS, which is at a discount to some large consumer goods companies.
Hence, the note said, “Strong earnings visibility with improving growth prospects of the core cigarette business and margin expansion in the non-cigarette FMCG business, along with a high cash-generation ability and strong dividend payout, will consistently improve valuations in the coming years. We maintain our Buy recommendation on the stock with an unchanged price target (PT) of ₹450.”
Among key risks, the note highlighted the government’s policies to curb tobacco product consumption or a sustained slowdown in consumer demand.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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