Japanese brokerage firm Nomura maintains ‘Neutral’ stance on ITC shares with a target price of Rs 316. On Monday, shares of ITC were at Rs 358. According to Nomura, the target for ITC is derived using a sum-of-the-parts valuation methodology.
The brokerage house value the core cigarette business at price-to-earnings of 17 times on FY18F earnings. Other SoTP valuations include: hotels at 20 times; paper at 8 times EV/EBIT; new ventures at 3 times sales; agri at 1 times sales; and cash and liquid assets of Rs 20 per share share.
A higher-than-required additional price hike taken by the company would hurt volumes and EBIT growth, posing a downside risk to the brokerage’s estimates. Lower-than-expected increases in taxes on cigarettes are the key upside risk.
Here are 5 key takeaways from the report
1) Total worldwide cigarette volumes declined 2.1 per cent y-y to 5.5tn sticks in CY15, the biggest year on year decline in more than two decades, according to data from Euromonitor. While volumes declined in Asia Pacific, Australasia, Latin America and Eastern Europe for Western Europe, the Middle East and Africa registered positive volume growth.
2) In response to the 10 per cent hike in excise duty by the central government and a 5-15 per cent hike in VAT by a few state governments, ITC has only increased prices by 13 per cent at the premium end of its portfolio translating into a weighted average price hike of 7.6 per cent, the lowest in four years. This makes Nomura optimistic of a boost in volumes for the company this year, after a constant decline over the past two years. The brokerage house however, do expect the company to take increase prices in FY17F as well.
3) Compared to other countries, India still imposes the one of lowest excise duties on consumers, and Nomura believes this situation is bound to change in the long term. Apart from previous consecutive excise duty increases and potential of greater excise duty hikes in the future, larger pictorial warnings on packs and a ban on the sale of loose cigarettes in certain states are further challenges that the company is facing currently.
4) The possible implementation of a 40 per cent goods and service tax (GST) continues to be an overhang.
5) According to Euromonitor, cigarette volumes declined 8.2 per cent y-y to 88bn sticks in CY15 in India, accounting for 1.6% of total world volumes. This 8.2% decline is the biggest year-on-year decline in the last 15 years, even though volumes have been declining since 2011. As a result of this volume decline, value growth for the cigarette industry in India for CY15 is a dismal 1.9 per cent compared to a five year average of 10.3 per cent indicating that the industry may be in structural decline.