ET Intelligence Group: Corporate tax cut, no increase in cess on cigarettes and ban on e-cigarettes — ITC has never had it so good on the regulatory front. The stock gained 9 per cent in the aftermath and there have been four upgrades in analyst recommendations in the past 10 days.
But irrespective of the upgrades, the average target price, as per data on Bloomberg, stands at Rs 325 — lower than the targeted level of Rs 340 six months ago.
To be sure, unlike other FMCG stocks, there has been no rally in ITC in the recent years. It is still 30 per cent away from the record high hit in July 2017. Despite the recent relief rally in the stock, it is down 13 per cent for the past one year — even as HUL gained 23 per cent, Nestle India 43 per cent and United Spirits 30 per cent during the same period. Incidentally, its peers from the Indian cigarette industry — Godfrey Philips and VST Industries — gained 24 per cent and 30 per cent, respectively. Sagging growth in cigarette sales has been a pain point for the company.
The moot question is will ITC use the tax break to stimulate cigarette volumesRs The company has been passing on the increased tax burden on cigarettes to the smokers. But a tax break and the resultant halt in price rises shall help the volumes to grow.
ITC remains the cheapest and most favoured stock by the analysts in the sector. Data from Bloomberg show 32 of the 37 analysts tracking the stock have a ‘buy’ recommendation on it. The ITC stock trades at the trailing priceto-earnings multiple of 25, against the multiple of 46.7 of the ET FMCG Index. Investors consider it to be a dividend stock rather than a growth one. At 2.25 per cent, its dividend yield is better than its peers in the FMCG industry — albeit much lower than its global peers like BAT, Altria and Philip Morris.
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It remains to be seen whether a tax cut and ban on e-cigarettes will help the company boost the cigarette volume growth that will have a corresponding impact on its stock price. Analysts see the next six months as decisive for ITC’s cigarette growth. The company's performance in the forthcoming two quarters will indicate whether it is able to make the most of these opportunities.
