GST ghost returns to haunt ITC; should you buy on dips?
Analysts looked worried in their growth projections and apprehend a GST blow soon.
NEW DELHI: If its venerated Chairman YC Deveshwar’s demise was an emotional setback for ITC, it now has the GST ghost after it.
ITC shares fell nearly 3 per cent on Monday even after the company delivered an 18.73 per cent year-on-year (YoY) rise in March quarter profit in line with Street estimates.
Turns out, investors and analysts have started discounting a GST rate hike on cigarettes after almost two years.
The FMCG firm on Monday reported Rs 3,481 crore profit in line with a Rs 3,201 crore profit estimate that analysts had made in an ET NOW poll. The company’s board also recommended a dividend of Rs 5.75 per equity share for the financial year ended March 31.
But analysts looked worried in their growth projections and apprehend a GST blow soon.
The company registered an 8 per cent volume growth in its core business for the quarter on a low base and a stable tax regime.
There may be strong pressure on volume growth if the GST Council increases the tax rates in its subsequent meetings as there has not been any rise in taxes on cigarettes for almost two years, participants said. “The more the delay, the more is the risk of a sharp tax rate increase, which would eventually exert significant pressure on volumes,” said Motilal Oswal.
After March quarter numbers, Motilal Oswal maintained a ‘neutral’ call on the stock with a target price of Rs 305.
ITC shares traded over 1 per cent higher at Rs 293 on BSE around 11 am (IST).
While the stock trades at a discount to its peers at 23.9 times FY21E earnings per share (EPS), it is at a premium to global cigarette majors (1.5 times-3 times). “Although ITC delivered in line performance, we marginally cut our EPS forecast for FY20 and FY21 by 2.8 per cent and 1.7 per cent, respectively, to factor in the challenging operating environment for consumer companies,” Motilal said.
Edelweiss has a different view. The brokerage has retained its buy recommendation on the stock with a target price of Rs 340, showing optimism on the opportunity in the cigarette segment.
“The cigarette opportunity in India remains attractive with per capita consumption at just 1/18th of that of China’s. Compared with global peers, where staples trade at a premium of nearly 35 per cent to cigarette companies, the premium in India is about 75 per cent, which should narrow,” the brokerage said.
JM Financial said ITC’s March quarter earnings were not great, but they were not bad either. The brokerage has a ‘buy’ recommendation on the stock with a target price of Rs 360.
“While cigarette Ebit growth of 10 per cent was slightly lower due to elevated costs, the market’s reaction was overdone. In our view, the result was admittedly not great, but not that bad either,” the brokerage said.
JM Financial said it likes the stock as the risk-reward looks favourable, considering the steep 45 per cent price-to-earnings (PER) discount to the sector against a 10-year average of 20-25 per cent.
Macquarie and Credit Suisse have ‘outperform’ view on the stock with target prices of Rs 376 and 370, respectively.
On the other hand, Morgan Stanley and JP Morgan have ‘overweight’ view on the stock with target prices of Rs 320 and 340, respectively.
Jefferies and BNP Paribas have given buy recommendation on the stock with target prices of Rs 360 and Rs 370, respectively.
Source- Economic Times.
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