Edelweiss upgrades ITC to ‘buy’ after Budget cheer

Mumbai: Domestic brokerage Edelweiss Securities has upgraded shares of ITC to ‘buy’ from ‘hold’ due to the government’s softer stance on excise duty hikes in cigarettes for two consecutive budgets.

The upgrade was also because of likely compulsory licensing of non-cigarette tobacco products and impact on unorganised cigarette market under the Goods and Services Tax, said Edelweiss in a note today, adding that ITC is now among its top picks. The brokerage has a target of Rs 337 on the stock.

The Budget brought positive news for ITC in the form of lower-than-expected hike in excise duty on cigarettes. Finance Minister Arun Jaitley hiked excise duty on various lengths of cigarettes by up to 6%.

This was lowest hike in the last six years and lower than expectation of 8-10% hike, said Edelweiss.

Shares of ITC hit a 52-week high of Rs 270.10 during the trading session today, before ending up 4.4% at Rs 269.50. The stock was among the top gainers on the benchmark Nifty index. ITC has gained 11.6% in the last one month and has risen 24.6% in the last one year. On both counts, it has outperformed benchmark indices.

Edelweiss has raised its estimate of cigarette volume growth for ITC in FY18 to 5% from 3% and increased earnings growth estimate to 16.1% from 13.6%.

The brokerage said ITC’s cigarette volumes in FY18 are likely to see a second year of growth after being down by about 15% between FY10 and FY16. The non-cigarette business will benefit from a sharp rise in rural stimulus, better insurance and credit to farmers, higher disposable income and focus on tourism, it said.

The valuation gap with Hindustan Unilever, which is at 40% currently, is likely to narrow due to ITC’s improving cigarette volumes and likely higher earnings growth than HUL in 2017-18 financial year, said Edelweiss.

On Friday, Kolkata-based ITC reported a 5.7% rise in net profit to Rs 2,646.73 crore for the quarter ended December and a 4.7% rise in total income from operations to Rs 13,569.97 crore. The company’s flagship cigarette business reported a revenue growth of 2.2% at Rs 8,287.97 crore.