ITC hits fresh 52-wk low; brokerages say increase in NCCD a big blow

ITC continued to bleed for the second consecutive day on Monday, after the Finance Minister, while presenting Union Budget 2020-21 on Saturday, proposed to increase the National Calamity Contingency Duty (NCCD) on cigarettes, hookah, chewing tobacco, snuff and tobacco extracts and essence. The stock slipped over 5 per cent and hit a fresh 52-week low of Rs 207.20 apiece on the BSE.

Stocks of other cigarette and tobacco manufacturers shares also declined in trade. While Godfrey Phillips India slipped over 4 per cent to Rs 1086.50, VST Industries fell over 2 per cent to Rs 4,128 levels.

Brokerages have lowered their estimates for ITC post the Budget announcement, saying a sharp increase in cigarette taxes is a heavy blow to the company. Credit Suisse noted that specific tax on cigarettes will increase up to 16 per cent across various slabs, which can prompt ITC to take a 10-15 per cent price hike in a very weak macro environment leading to a volume decline.

"Even after taking price hikes of over 10 per cent, cigarette earnings before interest and tax (EBIT) is likely to be flat in the best case in FY21. Additionally, risk of GST cess hike does not go away," the brokerage said in its note. Consequently, it has downgraded the stock to neutral with the target price of Rs 225 from Rs 230 earlier. JP Morgan, too, has downgraded the stock to Rs 235 apiece. Tax hike would impact volume growth and weigh on stock multiples, it said. The brokerage lowered FY21/22E earnings per share (EPS) estimates by 3 per cent.

In the past 12 months, shares of ITC have underperformed the market by falling 22 per cent against 7 per cent rise in the Nifty50 index. The NIfty FMCG has remained unchanged during the period.

Among domestic brokerages, analysts at Prabhudas Lilladher cut their weight on ITC from 2 per cent to 1 per cent (significant underweight) as imposition of excise duty is a structural negative. ITC will have to increase prices by 3.9-7.6 per cent across various cigarette segments, which will impact volume growth. "We note that cigarette volumes are under pressure due to poor demand in rural India. We now estimate 1 per cent decline in cigarette volumes in FY21 and 3 per cent increase in FY22," they wrote.

Moreover, the brokerage beleived that this trend of increasing taxes under NCCD opens a Pandora box for further tax increases in future. The brokerage has cut target price to Rs 296 and expect the stock to continue underperforming, noting that valuations remains compelling.

Koatk Securities, however, note that the effective tax increase will be in the range of 5.4-13.8 per cent for different stick lengths and VST Industries and Godfrey Phillips will have a much higher contribution from 64 mm sticks and this would hurt them more than ITC. "We were baking in around 10 per cent portfolio-level increase in tax/stick for FY2021E, so this shouldn’t hurt our estimates much for ITC," they said.

The company on Friday reported a 29.03 per cent increase in consolidated net profit at Rs 4,047.87 crore for the third quarter ended December 2019. The company had posted a net profit of Rs 3,136.95 crore in October-December quarter of the previous fiscal. Net sales during the quarter under review rose 5.71 per cent to Rs 13,220.30 crore as against Rs 12,506.05 crore in the corresponding period in previous fiscal.

Revenue from cigarettes stood at Rs 5,944.86 crore in the October-December quarter, up 5.31 per cent from Rs 5,645.05 crore in the corresponding period last fiscal.