Brokerages expect weaker FY2016 for ITC Group

Brokerages predict a weaker FY2016 for the ITC group in the next fiscal, expecting a continued decline in cigarette volumes.

Harit Kapoor of IDFC Institutional Securities said in a note, given the government’s stance on the industry, the upcoming anti-tobacco bill amendments pose a risk to the business. He added, “We expect that with another round of price increases recently taken, pressure on volumes will persist in FY16 and factor a 7 per cent volume decline for the year.”

Keeping in mind the continued regulatory risks on the business model, IDFC maintains an ‘Underperformer’ for the tobacco company’s stock. IDFC’s target price (TP) has declined 7 per cent at Rs 311.

Kapoor also said, “The government’s irrational approach to taxation for the organised cigarette industry vis-a-vis other tobacco products and the unorganized cigarette industry has created a wide gulf in pricing, which is showing in the 13-15 per cent volume decline for ITC over the last couple of quarters, the steepest volume decline in its history.”

Rohit Chordia of Kotak Institutional Equities said a weak exit to fiscal year 2015 makes the prognosis for FY2016 weak as well.

“We expect FY2016E to be another year of single-digit operating profit and earnings-per-share (EPS) growth. FY2017E performance remains contingent on the extent of taxation pressure in the FY2016E union budget.”

Kotak retains an ‘Add’ rating with a revised TP of Rs 360 from Rs 370. Chordia has said that presently, the stock is a combination of an uncertain with a negative bias and taxation outlook on cigarettes; modest earnings expectations but with no visible upgrade triggers; no visible nonearnings positive triggers; and relatively inexpensive valuations (30 per cent discount to the rest of the sector on FY2016E PE).

ITC on Friday reported a modest 3.7 per cent profit after tax growth at Rs 2,361.18 crore. The company reported a revenue growth of 0.6 per cent at Rs 9,185.25 crore. Cigarette volumes declined by 13-14 per cent in FY2015 as consumption suffered on account of the steep price increases and the PAT growth was impacted by Rs 580 charge on rationalisation of Wimco operations and higher CSR expenses in the quarter.

Harsh Mehta of HDFC Securities said despite the steep volume decline in cigarettes, ITC’s EBIT growth for FY15 is resilient at 11.8 per cent. “The management is confident of low teen EBIT growth in FY16E, which we think is achievable. We believe volume growth may well return in cigarettes from FY17E which may drive EBIT growth higher than aspired by us. FMCG business continues to gain market share on the back of resilient volume growth.”

HDFC reiterates a ‘Buy’, with a TP of Rs 394, implying an approximate 25 times EPS in FY17E.

Gaurang Kakkad of Religare Institutional Research said in a note that the Q4 growth was hit be muted growth in cigarettes and FMCG.