ITC gains 2% in weak market, nears record high; stock up 19% from June low

ITC rose 2% to Rs 479.35, quoting higher for the sixth straight trading day, and was 4% shy from its record high level of Rs 499.60 touched on July 24, 2023.

Shares of ITC hit a six-month high of Rs 479.35, gaining 2 per cent on the BSE in Friday’s intra-day trade, extending its northward movement on hopes of steady earnings growth. Analysts do not see a high probability of a tax hike given legal cigarette volumes are soft while tax was hiked last year. In comparison, the BSE Sensex was down 0.43 per cent or 349 points at 80,995 at 11:23 am.

The stock price of cigarettes-to-hotels conglomerate was trading at its highest level since January 5, 2024. The stock was 4 per cent away from its record high of Rs 499.60 touched on July 24, 2023. The stock was quoting higher for the sixth straight trading day, having rallied 6 per cent during the period. The stock has bounced back 19 per cent from its previous month low of Rs 403 hit on June 4.

ITC on Thursday after market hours informed that the meeting of the board of directors of the company is scheduled on August 1, 2024 to consider and approve the financial results of the company for the quarter ended 30th June, 2024 (Q1FY25).

ITC's cigarette business has seen volume recovery in FY23 and FY24, with cigarette volume almost at par with its peak volumes in FY13. Stability in taxes and various government initiatives to curb illegal cigarettes have been supporting the legal cigarette market. Motilal Oswal Financial Services model a 6.5 per cent revenue CAGR, 3.5 per cent volume CAGR and 6.5 per cent earnings before interest tax (EBIT) growth during FY24-26E with steady macros and taxes.

Taxes on cigarettes in India are 14x of the US, 7x of Japan and 6x of Germany and so on. Further, the same is also substantially higher than that in neighbouring countries. Historically, steep increases in taxation have adversely impacted tax collections and legal cigarette volumes, while a stable tax regime has led to buoyancy in tax collections, ITC said in its FY24 annual report.

India is the world's second largest consumer of tobacco, yet legal cigarettes make up only 9 per cent of total tobacco consumption. Illicit trade in cigarettes causes an annual revenue loss of around Rs 21,000 crore. Legal cigarettes contribute over 80 per cent of revenue generated from the tobacco sector, analysts at Nuvama Institutional Equities said.

“We shall closely monitor the upcoming Budget, particularly the new Health Minister's position on tobacco taxation. However, we reckon a cigarette tax hike is unlikely,” the brokerage firm said in company update. It has ‘Buy’ rating on ITC with a target price of Rs 540 per share.

For cigarettes, analysts at Emkay Global Financial Services see gross revenue growth at ~9 per cent with ~4 per cent volume growth in Q1FY25. Recovery of volume growth in the northern market is likely to help. Ahead of the budget, any trade stocking is likely to aid volume further. Segment EBIT margin is likely to see 155bps contraction YoY (to 72.6 per cent) on the back of inflationary raw material pressures, the brokerage firm said in Q1FY25 preview.

Going ahead, analysts at KRChoksey Shares & Securities believe a stable tax structure will help ITC continue to gain volumes from illicit trade. The FMCG-Others business continues to see stable growth on the back of its continuous focus on new and innovative launches and will see further improvement as consumption sees an uptick. Premiumization and cost optimization will continue to aid profitability for the FMCG-Others business. The pipeline of upcoming properties in the hotel segment will assist in maintaining a robust growth trajectory.