ITC races ahead of HDFC Bank, Infosys

A day after Finance Minister Arun Jaitley announced a 10 per cent rise in excise duty on cigarettes, the ITC stock rallied 10 per cent on Tuesday to close at Rs 325.1 apiece on the BSE. As a result, ITC surpassed Infosys and HDFC Bank to emerge as the third-most valuable company in market valuation on the BSE. The company's market valuation stood at about Rs 2.6 lakh crore.

The ITC stock, which opened Rs 9 higher than its Monday's closing, happened to be one of the major contributors to the 700-plus Sensex rally on Tuesday. This was in a sharp contrast to investors' reaction on Monday when the announcement on excise duty increase led to a seven per cent fall in the stock.

ITC on Tuesday rose 9.9 per cent to close at Rs 325 a share on the BSE. During the day, it soared 10.5 per cent to Rs 327. With a steep rally, the stock also emerged as the top gainer on Sensex.

Several brokerages came out with positive report on ITC with Credit Suisse upgrading the stock. According to the Tobacco Institute of India, since 2012-13, the incidence of excise duty rise on cigarettes, at a per unit level, has gone up cumulatively by 98 per cent. The 10 per cent increase announced in this year's Budget will take up the cumulative duty impact since 2012-13 to 118 per cent.

Given the continuing trend, analysts had factored in an eight to 10 per cent increase, some were even expecting a 15 per cent rise.

"We expect ITC to easily pass this on to consumers with a minimal impact on volume growth," Religare said in a note.

Abneesh Roy of Edelweiss said the growth in earnings-per-share, which was two-three per cent this year, could be in the high single digits. "As a result, it struggled on the volumes front with a decline of four per cent in FY14, nine per cent in FY15 and 9-10 per cent in FY16. We believe a price hike to the tune of 5-6 per cent can completely pass on the burden of excise increase from the company. We have modelled a volume de-growth of three per cent each for FY17E and FY18E and price increase of 10 per cent each for FY17E and FY18E," ICICI Securities analysts said.

Apart from the fact that the excise increase is not expected to be particularly damaging, two other factors are likely to work in ITC's favour. First, the Finance Minister's speech did not mention any stake sale. News relating to the government's stake sale through SUUTI, which holds 11.19 per cent in the company, had dragged the ITC stock over last couple of months.

Also, ITC is a diversified company and around 50 per cent of its revenues come from non-cigarette business. The rural push of the government is likely to give a fillip to its non-cigarette FMCG business.

After the Nestle controversy, noodles market had shrunk by around 90 per cent. "During this time, ITC noodles cornered a 33 per cent market share, double of what it had. Also, the occupancy rate in the hotels industry is at a five-year high so margins will be better. And the last year was unusually bad for the agri-commodities business which is unlikely to be repeated this year," Roy added.