ITC hits new 52-wk low; Rise in NCCD a big blow

On Monday, ITC continued to hit the new low for a second consecutive day, after the Finance Minister proposed to increase the National Calamity Contingency Duty (NCCD) on cigarettes, hookah, chewing tobacco, snuff and tobacco extracts and essence while presenting Union Budget 2020-21 on Saturday. 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 weakened in trade. While Godfrey Phillips India fell more than 4% to Rs 1086.50, VST Industries fell more than 2% to Rs levels 4,128.

Brokers lowered their estimates for the ITC after the budget announcement, saying that a sharp increase in cigarette taxes is a blow to the company. Credit Suisse noted that the specific tax on cigarettes would increase up to 16 per cent on several slabs, which can lead ITC to take a 10-15 per cent price increase in a very weak macro-environment that leads to a decrease in volume.

The brokerage mentioned in its note, "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, the risk of GST cess hike does not go away." Consequently, it has lowered the shares to neutral with the target price of Rs 225 from Rs 230 previously. JP Morgan has also reduced the shares to Rs 235 each. The tax increase would affect volume growth and affect multiple stocks, it said. The broker reduced earnings per share (EPS) estimates for fiscal year 2011/2022 by 3 per cent.

In the last one year, ITC shares have had a lower return to the market by falling 22 per cent compared to the 7 per cent increase in the Nifty50 index. The FMCG NIfty has remained unchanged during the period.

Among national brokerages, Prabhudas Lilladher analysts reduced their weight in the ITC from 2% to 1% (significant underweight) since the imposition of excise duties is a negative structural factor. The ITC will have to increase prices by 3.9-7.6 per cent in several cigarette segments, which will affect volume growth. They wrote, "We note that cigarette volumes are under pressure due to poor demand in rural India. We now estimate a 1 per cent decline in cigarette volumes in FY21 and a 3 per cent increase in FY22."

Kotak 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 more significant 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.

On Friday, the company 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 posted a net profit of Rs 3,136.95 crore in the October-December quarter of the previous fiscal. Net sales during the quarter under review increased 5.71 per cent to Rs 13,220.30 crore as against Rs 12,506.05 crore in the corresponding period during the last fiscal year.

Revenue from cigarettes was Rs 5,944.86 crore in the October-December quarter, 5.31 per cent more than Rs 5,645.05 crore in the last fiscal year.