ITC Ltd shares declined as much as 6.4% on Monday to hit new 52-week low after the Union Budget 2020 proposed to raise excise duty on tobacco and cigarettes. The stock had fallen 7% in the previous session on Saturday as well.
ITC shares hit a low of Rs 205 apiece in intraday trade on Monday. At 11:47 am, the stock was trading at Rs 212.45, down 3%. Notably, the stock had fallen over 23% in the last one year.
Brokerage firm Sharekhan said that the tax rate on cigarettes has been raised by 6-12% depending on the size of the cigarette. The weighted average tax rate increase for ITC stands at 9%, it added.
Cigarette sales volume growth was already muted at 2% in the December quarter, and price increase of 10% would put further stress on sales in the near term, Sharekhan said.
“We have reduced our earnings estimates to factor in lower-than-earlier expected cigarette sales volume for FY2021 and FY2022 and downgraded our rating on the stock to ‘hold’ with a revised price target of Rs 242,” it added.
JP Morgan also downgraded the stock to ‘neutral’ from ‘overweight’ and cut the target price to Rs 235. It said the tax hike would impact volume growth and weigh on stock multiples, however, the strong economic franchise makes it attractive at 5-7% potential downside.
Another brokerage firm Investec, meanwhile, maintained a ‘buy’ call on ITC stock but cut the target to Rs 259 from Rs 290 per share.
“It is first sizeable increase in taxes on cigarettes since July 2017 and we expect the company to raise prices by over 6-7%,” it said.
The research house cut earnings before interest, tax, depreciation and amortization (Ebitda) estimates by 3.7/5.6% for FY21/22, reduced cigarette volume and EBIT growth assumptions from 4% to 2% for FY21/22, while maintaining a ‘buy’ call due to decadal low valuations.
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