ITC shares under pressure ahead of Budget amid murmurs on sin tax hike

FMCG business is expected to see strong 19.2 per cent growth led by traction in discretionary categories, price hikes taken in the last one year and recovery in education and stationary business.

Cigarette volume has been on an upward spiral since FY18 when it was 85 billion sticks, which rose to 91 billion sticks in FY19. Image Source: PTI

Shares of ITC traded under pressure on Thursday, tracking weak sentiment in the domestic equity market as traders eagerly await the US inflation data for December month. ITC shares quoted Rs 329 apiece on NSE around 1 PM, down by nearly 1 per cent.

Brokerage firm Nomura has given a neutral rating on ITC amid concerns about a hike in the tax on cigarettes in the upcoming Union Budget on February 1, 2023. The Japanese research firm has given a price target of Rs 360 per share, implying an upside of about 10 per cent from the current market price.

The shareholders are concerned that the counter may crack if the government raises tax on cigarettes in the upcoming budget. The rise in taxes may also allow room for illegal cigarettes to occupy the market share.

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Nomura has maintained that the FMCG's contribution to overall business will remain modest while margin improvement to remain gradual and contained with low probability of divestment.

Cigarette volume has been on an upward spiral since FY18 when it was 85 billion sticks, which rose to 91 billion sticks in FY19. The sales volume declined marginally to 90 billion sticks in FY20 before plunging to 77 billion sticks next year due to the pandemic. In FY22, the volume went up again to hit 88 billion sticks.

Further, after the ban on single-use plastic, the outer packaging of cigarettes will need to shift to biodegradable materials, which will also increase cost to some extent. These are expected to impact gross margins, the report pointed out.

ITC Q3 Expectation

Domestic brokerage house ICICI direct said that ITC in the third quarter is expected to witness 5.9 per cent revenue growth on the back of strong growth in cigarettes, FMCG, paperboard and hotels business. Agri business is expected to see sales decline mainly due to restriction on wheat and rice exports during the quarter. It estimates 10.3 per cent cigarettes sales growth led by 7 per cent volume growth.

FMCG business is expected to see strong 19.2 per cent growth led by traction in discretionary categories, price hikes taken in the last one year and recovery in education and stationary business. Paperboard segment is expected to see strong pricing & volume growth.

Its hotels business is likely to see strongest occupancies and ARRs since Covid-19 outbreak. Agri business is likely to see 7.6 per cent sales decline mainly on account of export restriction on many agri commodities. "We estimate 12.6 per cent growth in operating profit on account of operating leverage in cigarettes & softening of palm oil prices. We estimate 8.4 per growth in net profit during the quarter," it said in a research report.

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