ITC’s shares have gained over 5% so far in two consecutive trading sessions on smaller than expected hike in excise duty on cigarettes proposed by Finance Minister Arun Jaitley in the Union Budget 2017-18.
The cigarette-major’s shares were up 1.11% on BSE at Rs 272.7, after rising to the day’s high of Rs 279.9 amid lower broader markets, which shed some of yesterday’s gains on profit booking.
Jaitley proposed to hike excise duties on cigarettes by about 6.5% in his Union Budget for the next financial year 2017-18. ITC earns over 60% of its revenue from selling cigarettes. Its other business interests include FMCG products, hotels and paper.
Brokerage firm Edelweiss has revised its rating on ITC to ‘buy’ from ‘hold’ earlier, on the government’s softer excise duty hikes on cigarettes in two consecutive budgets. Further, the mandated licensing of other tobacco products and the impending Goods and Services Tax impact on the unorganised sector are also likely to help ITC, which is the organised market leader.
HDFC Securities maintained its ‘buy’ rating on ITC shares and raised the target price to Rs 300 from Rs 284, saying that the budget recommendations are positive for the company. “We believe 3-3.5% hike in cigarette prices will be sufficient to mitigate the increase in excise duty,” HDFC Securities said, adding that this price hike would be lower than the inflation in India.
The brokerage has raised its target P/E ratio on ITC’s stock to 28x from 27x “on account of better pricing power in cigarette business”.
CLSA also maintained its ‘buy’ rating on ITC, but said the company would have to raise cigarette prices by over 4% to pass on the impact considering a weighted average.
Kotak Securities and Religare Research too said that the 6% hike in excise duty is less than expected and is positive for the cigarettes sector.
Earlier last month, ITC said its fiscal third quarter growth was impacted due to demonetisation. Its net profit grew at 5.7% on-year to Rs 2,646.73 crore, while operating revenue in the quarter grew 4.5% -on-year to Rs 13,470.89 crore.