Morgan Stanley expects up to 46% upside in ITC share price

TC could see up to a 46 per cent upside in its stock price as the country’s second-most valuable consumer company is likely to be a major beneficiary of last week’s across-the-board cuts in corporate levies, Morgan Stanley said in a note to its clients.

India’s biggest cigarette maker, which has diversified into hotels, consumer staples and stationery goods over the past two decades to reduce its revenue reliance on tobacco, can now defer a price increase in cigarettes after Finance Minister Nirmala Sitharaman announced sharp reductions in corporate taxes, the brokerage said. A rise in the affordability quotient could help stabilise cigarette sales volumes.

Shares of ITC climbed 1 per cent to ₹252.90 on Friday. The stock has gained nearly 7 per cent since the announcement of corporate tax cuts by the government last Friday despite speculation that supplies could rise if the SUUTI stake were sold to help New Delhi mop up additional funds through disinvestment.

Morgan Stanley has raised the target price on ITC to Rs 370 from ₹360 with an ‘overweight’ rating on the stock. The brokerage doesn’t expect a price increase by the maker of Gold Flake and Classic brands of cigarettes in the rest of the financial year, but believes that the Kolkata-based company is still likely to deliver 19 per cent earnings growth in FY20.

“Increased near-term pricing flexibility will strengthen longterm growth prospects. Finally, with 4 per cent sustainable FY21 dividend yield, risk-reward is compelling,” Morgan Stanley said in the note.

To be sure, tobacco remains the primary profit driver at ITC, which has over the past two decades expanded into personal care, hair care, and snack-foods businesses. It continues to trade at a significant discount to Hindustan Unilever, the country’s most valuable consumer goods company.

Morgan Stanley has raised ITC’s FY20 earnings per share (EPS) estimates by 8.7 per cent and 6.4 per cent for FY21, respectively. The US investment bank estimates ITC will report cigarette business growth of 3 per cent and 5 per cent, respectively, over these two years. ITC has taken around 3 per cent cumulative price increases since July 2017, improving the relative affordability of cigarettes.

“We expect ITC to defer cigarette price hikes for 2-3 quarters, allowing further moderation in volume elasticity. This, combined with falling duality of tobacco consumption, will support volume growth,” said Morgan Stanley.

The company had reported a 12.6 per cent increase in standalone net profit to ₹3,173.94 crore while revenue from operations for the quarter grew by 5.7 per cent to ₹11,502.82 crore.

“We see upside risks from higher cigarette volumes and consequently better price power,” said Morgan Stanley. “Relative value, increased confidence in nearterm earnings growth and standout risk reward keep us OW (overweight),” the brokerage said, explaining its rating on the stock.