Investors are rejoicing the fact that the Union Budget did not recommend any change in cigarette taxation. However, analysts believe a pick up in cigarette volumes will play a key role in improving sentiments for the stock, hereon.
No news is good news. That’s what investors of cigarette maker, ITC Ltd are rejoicing about. Yesterday's Union Budget has not recommended any change in cigarette excise (NCCD-National Calamity Contingent Duty). Recall that last year, the cigarette tax hike was quite steep at around 13%.
“A status quo scenario works well for ITC; there was anyway quite a bit of pressure on the volumes front. Cigarette is one of the very few consumer businesses that has not benefited whatsoever from the ‘unlocking’ of the economy yet. An unchanged tax structure should, in our view, help the industry to gradually win back some of the volumes lost earlier to the contraband segment, which now accounts for more than 20% of the industry," point out analysts from JM Financial Institutional Securities Ltd in a report published on 1 February.
Unsurprisingly, shares of ITC rallied, touching a new-52 week on Tuesday on the NSE. Overall, in the past two days, the stock has increased by 9%. “No change in cigarette taxation is a positive for ITC. The focus will now shift to volume growth recovery and future GST council meets," said analysts from Jefferies India Pvt. Ltd in a 1 February report.
"In the past when there have been no tax hikes on cigarettes, ITC's cigarette volumes have grown. The last such period was from 2Q FY19 to 3Q FY20, where on a YoY basis there were no cigarette tax hikes. In this period, ITC was able to deliver low-to-mid single digit volume growth, despite a very weak macro environment for consumption in that period where FMCG industry's growth was mid-single digits," said analysts from Credit Suisse Securities (India) Pvt. Ltd in a report on 1 February.
The pandemic has weighed heavily on ITC’s cigarette volumes in this financial year (FY21). For the June and September quarter, JM Financial estimates cigarette volumes to have dropped 38.5% and 12%, respectively, on a year-on-year basis. ITC will announce its December quarter results on 11 February. To be sure, analysts expect the firm’s cigarette business volumes to decline in the December quarter as well, albeit at a slower pace on a sequential basis. On the other hand, the fast-moving consumer goods (FMCG) business is expected to perform well. It will be interesting to note here if its growth in the FMCG segment tapers in the December quarter compared to the first half of FY21.
Meanwhile, even as ITC’s shares have jumped in the past two days, it's worth noting the stock is still nearly 9% away from its pre-covid highs seen in January 2020. While some analysts do find ITC’s valuations appealing, a pick up in cigarette volumes would play a key role in improving sentiments for the stock, hereon.