ITC bounces back on value buying; Morgan Stanley says 'buy on dips'

NEW DELHI: ITC which commands the highest weightage in the Sensex managed to bounce back nearly 3 per cent in trade on Wednesday, after falling as much as 5 per cent in trade in the previous session, on news that the health ministry has accepted the recommendation of expert panel to ban the sale of loose cigarettes.

The stock has remained range-bound after hitting a new high of Rs 386.75 in May this year, but has managed to rally over 12 per cent so far in the year 2014.

At 09:50 a.m.; ITC was trading 2 per cent higher at Rs 362.80. It hit a low of Rs 357.60 and a high of Rs 366 in trade today.


The regulatory policy on cigarettes will be a critical development to watch out and may well remain an overhang in near-term, but analysts at top brokerage firms feel that the broader story remains intact and investors should try and accumulate the stock on dips.

"While we believe that the implementation of a restriction on sale of loose cigarettes will be difficult, this is a clear sentiment negative for ITC," global investment bank, Morgan Stanley said in a report which has an 'overweight' rating on the stock.

In the near-term the stock will trade weak; however, the global investment bank recommends investors buy on every dip for the following reasons:

1) ITC trades at a 30 per cent discount to the consumer staple stocks under our coverage.

2) Even if there is a ban on sale of loose cigarettes, we expect cigarette companies in India to introduce smaller pack sizes (say 5 sticks per pack) to cushion the impact of this policy change.

3) It is interesting to note that chewing tobacco is banned in 20 states and yet it is freely available, based on our channel checks.

4) Large duality of tobacco consumption in India, with rapid decline in duty paid cigarette consumption vs. other forms of tobacco should eventually force the government to reduce the disparity in tax incidence on tobacco.

ITC has been traditionally trading at a discount to the sector multiple and it looks like the worst scenario is already built up in the price, say experts.

Mahantesh Sabarad, Deputy Head Research, SBICap Securities we have seen that cigarette volumes have actually fallen in the last two quarters. Now, with the ban coming in for sale of lose cigarettes, probably the cut will be deeper in terms of volume numbers but even then, ITC has been trading quite cheap.

"For us, it was trading at around 22 multiples forward earnings but even if we assume that volumes will be down, probably the stock will trade somewhere around 26 multiples. Even then, a 26 multiple whereas the sector average is 30, there is still room to catch up," he adds.