After Budget newsflow on GST rates, demand hold key for ITC stock

Shares of the cigarette maker hit 52-week high after the Budget left taxes unchanged

Shares of ITC, the leader in domestic cigarettes industry, advanced close to 3.5 per cent intra-day to hit a fresh 52-week high of Rs 223.5 per share on the NSE on Tuesday. The stock though witnessed some profit-booking before ending the day with 1.2 per cent gains, but is still up 7.5 per cent in the past two days.

The gains come on the back of no mention of a widely expected hike in National Calamity Contingent Duty (NCCD) in the Budget. To put it into context, analysts were expecting the finance minister to increase taxes on cigarettes in order to shore up the government's finances which have been impacted on account of the Covid-19 pandemic. 

Since there was no change in excise duty on cigarettes, it has alleviated concerns of volume pressure, say analysts. 

“No excise hike is positive for cigarette companies. The steep hikes in the NCCD in the previous budget (by 11-16 per cent) and during the pandemic have led to a sharp deterioration in volumes in FY21. Overall, this offers volume assurance to companies,” said Mehul Desai, research analyst at Anand Rathi. 

While the pandemic hurt volumes significantly, analysts point that the last 20 quarter average of –2 per cent is hardly inspiring. Even in December 2020 quarter, ITC's volumes are seen declining by 8 per cent over the previous year, according to Kotak Institutional Equities. Subsequently, analysts expect a recovery in volumes only from next year on the back of a low base of FY21. But, here too, the optimism is on a cautious note.

 

While the Budget has passed with negative news, the possibility of an increase in GST rates remains a concern. 

“In the past, the absence of such an announcement during the Budget would be met with exultation. However, the positive impact may be short lived as a GST increase on cigarettes could be part of any subsequent GST Council meets,” said Motilal Oswal Securities. Typically, any decision pertaining to change in the GST rates are taken by the GST council and are announced separately.

Therefore, it would be prudent for investors to await clarity on this front.

Continued regulatory headwinds such as the proposed Cigarettes and Other Tobacco Products Amendment Act, 2020 announced last month, and concerns on ESG front pose further challenges for cigarette makers as well as investors. 

Positively, ITC's FMCG business has seen good gains in profitability in the past few quarters and the potential remains strong. But, it is still a small contributor to ITC's earnings to move the needle meaningfully. Pandemic hit-hospitality business should also see improvement as the economy and travel activities open up.