CLSA downgrades ITC as govt hikes excise duty

Changes stance after 7 years; Edelweiss maintains buy

CLSA downgrades ITC as govt hikes excise duty

CLSA, Asia’s leading and longest-running independent brokerage and investment group, downgraded the rating on India’s largest cigarette manufacturer ITC to ‘sell’ after seven years of positive stance on the stock.

The move comes after finance minister Arun Jaitley hiked excise duty on cigarettes by 12-22 per cent in the Budget presented on February 28.

“After seven years of positive stance, we downgrade ITC to ‘sell’ (from buy) due to government's hawkish stance on cigarettes which saw another double-digit hike and also, cut our EPS estimates by 5-10 per cent over FY16-17. The inclusion of tobacco taxation under 'Public Health' also seems to be a departure from the past objective of revenue  maximisation through tax hikes. This also raises concerns on tobacco regulations ahead which have a much higher impact on legitimate industry, while bidis and other forms along with illicit cigarettes may benefit,” CLSA said in a note to investors.

The brokerage firm also cut its estimates due to the higher excise duties which is likely to lead to a decline in volumes for ITC. “We cut our EPS estimates by 5-10 per cent as we build higher cigarette excise duties for FY16-17 and lower our volume assumptions. We now build-in 5 per cent cigarette volume decline in FY16 (after 7 per cent decline in FY15) and flat volumes in FY17. We now forecast 9-11.5 per cent (YoY) rise in cigarette EBIT over FY16-17,” the CLSA note said.

Loss in mkt capitalisation

Investors have been dumping the stock of ITC over the last couple of days. On Saturday, when the Budget was presented the stock had corrected over 9 per cent, while on Monday the stock closed with a loss of nearly 5 per cent.

The total loss in market capitalisation of the company has been to the tune of a little over Rs 40,000 crore over the last couple of days itself. No wonder then that other brokerage firms maintained a cautious stance on the stock was well.

“The overhang of steep excise hikes is likely to continue for the next four years. Although ITC is around 30 per cent cheaper than the average consumer pack, it is unlikely to re-rate in near term. We maintain ‘buy’ on dips from longer term perspective, Edelweiss said in a note post the Budget.

“We move our rating on ITC to ‘hold’ as we see no immediate visible trigger that could narrow the stock's discount versus the broader consumer set, after what transpired in the Union Budget,” JM Financial said in a note to investors.

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