ITC gains 3% ahead of Budget 2025 on heavy volumes; sin tax in focus

Nuvama Institutional Equities reckons a low probability of a sharp hike in cigarette tax in the upcoming budget (1 Feb-25) given a small tax hike was taken last year.

Shares of ITC moved higher by 3 per cent to Rs 448.25 on the BSE in Friday’s intra-day trade amid heavy volumes ahead of Budget 2025 on Saturday, February 1, 2025.

 

At 03:04 PM; ITC was trading 2.6 per cent higher at Rs 447.75, as compared to 0.90 per cent rise in the BSE Sensex. The average trading volumes at the counter nearly doubled with a combined 12.31 million equity shares changing hands on the NSE and BSE. However, in the past one year, ITC has underperformed the market by gaining 1 per cent, as against 8 per cent surge in the BSE Sensex and 3 per cent rise in BSE Fast Moving Consumer Goods (FMCG) index.

 

ITC is diversified consumption play with presence in businesses such as cigarettes, FMCG, hotels, Agri and Paperboard, Paper & Packaging (PPP) in India. It is a market leader in the domestic cigarette and PPP business.  Its strategy hinges towards utilising funds generated from cash cow cigarette business in improving the growth of FMCG and other businesses.

 

Cigarette volume growth momentum is expected to be sustained if the government does not increase taxes for the second consecutive year. In the near term, a higher base will lead to lower growth in the cigarette business.

 

The domestic cigarette industry in the past was affected by a sustained rise in taxes and regulatory regimes along with a sharp rise in illegal trade in the past few years, especially at the premium end, which continues to pose significant challenges to the legal cigarette industry. However, in recent times, the government has undertaken stringent actions to curb illicit cigarette sales. This, along with lower price hikes in the cigarette portfolio, will help cigarette companies post better volume growth, according to Mirae Asset Sharekhan.

 

On the FMCG front, normal, widespread monsoons and government support (especially before elections) might help rural demand to gradually pick up. For margins, stable raw-material prices after the recent correction in prices of some key inputs (including crude oil and vegetable oils) will help margins consistently improve in the coming quarters, the brokerage firm said.

 

Nuvama Institutional Equities reckon a low probability of a sharp hike in cigarette tax in the upcoming budget (1 Feb-25) given a small tax hike was taken last year; and legal cigarette volumes are gradually recovering amid an urban slowdown (~3 per cent volume growth YoY). In case of a double-digit tax hike, tax collections could suffer due to the negative effect on legal cigarettes and market share gains for illegal players, the brokerage firm said company update.

 

Although the brokerage firm remains near-term cautious on ITC due to its weak FMCG business in Q3FY25, however it retains ‘BUY’ rating with a target price of Rs 571 per share due to a recovery in the Agri business, dividend yield and comfortable valuations.