Concerns around ITC's cigarettes biz easing a bit

ITC's latest December quarter results were dampened by demonetisation particularly the FMCG business

A stake sale by the government-owned SUUTI fired up the ITC scrip, which made a new all-time high of Rs 291.95 a piece in Tuesday’s trade. In fact, the stock has had a healthy run in the past one month on the back of multiple positive news flow. First, the increase in excise duty on cigarettes in the Union Budget was much below Street expectations and will enable the cigarette-maker to implement price hikes without hurting volumes much. Second, the duties on competing products such as bidis were increased by a much bigger margin.
 

This could accelerate consumers, shift towards organised cigarettes made by ITC and other listed peers. Third, a host of sops offered by the Budget to boost rural economy, as well as increase disposable incomes, will rub off favourably on ITC’s non-cigarettes businesses of fast moving consumer goods (FMCG), hotels and agri, amongst others. Not surprisingly then, the ITC stock has been on an uptrend since the Budget.
 
Though the typicall worries of a sharp increase in duties on cigarettes in the Budget is behind ITC, its valuations at 26 times the FY18 estimated earnings are also relatively undemanding when compared to peers in the consumer staples sector. The focus  will now shift to goods and services tax (GST), as well as the company's financial performance.
 
Lack of clarity  around taxation of cigarettes under the GST mechanism is a key overhang on the  stock, even as GST will create a level playing field between organised and unorganised players and provide market share gain opportunities for most of ITC's businesses in the long run.
 
The company's latest December quarter results were dampened by demonetisation particularly the FMCG business. Investors need to watch out for normalisation of this impact. Overall, sustained profitability of the FMCG business will act as a key catalyst for the ITC stock given that this segment's profitability has been rather choppy so far.