When it comes to the Union budget, one stock that is always in focus is ITC Ltd. The cigarette maker’s shares jumped more than 4% on the National Stock Exchange (NSE) on Tuesday, a day when the benchmark Nifty 50 index was fell marginally.
The reason is simple. Taxes on tobacco have remained unchanged in the Union Budget 2004-25 and that’s a relief for ITC.
“We note that the last tobacco tax hike was at about 2% in February 2023. This should allow ITC to focus on volume by taking minimal product price hike and hence a key positive,” said analysts from Jefferies India in a report titled, ‘No News is Great News.’
The cigarette business is ITC’s mainstay, accounting for close to 40% of total gross segmental revenues in FY24 and almost 80% of its total segment Ebit (earnings before interest and tax).
With clarity on cigarette taxation, Jefferies’ analysts believe ITC is well-placed to accelerate cigarette revenue growth through a blend of volumes, price hikes, and better mix.
In the immediate future, investors will look to the June quarter (Q1FY25) results for further cues, though expectations remain modest. Analysts from Nuvama Institutional Equities anticipate ITC’s cigarette volumes to have grown 2-3% year-on-year in the June quarter, consistent with the subdued volume growth seen in the second half of FY24. Nuvama also expects ITC’s FMCG business to grow by 7.2% year-on-year, with flat margins.
Despite Tuesday’s surge, ITC stock has underperformed the Nifty 50 index so far this year. However, valuations are not overly demanding.
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According to Jefferies, ITC trades at 27x one-year forward earnings per share estimates (EPS), slightly lower than its pre-pandemic history. The brokerage has upgraded ITC’s EPS by 1-2% and raised the price target for its shares to ₹585 apiece. Currently, the stock is trading at about ₹497 on the NSE.
