ITC jumps 6% to scale new lifetime high ahead of Q3FY23 results

Shares of ITC rallied 6 per cent to hit a new lifetime high level of Rs 384.40 in Thursday’s intra-day trade, as brokerages believe that the proposed tax hike on cigarette in the Union Budget 2023 is not very high and would be easily passed on through small price increases.

The stock of diversified fast moving consumer goods (FMCG) major zoomed 17 per cent from its Wednesday’s low of Rs 329.

At 11:06 am; ITC quoted 5.4 per cent higher at Rs 381.10, as compared to 0.04 per cent decline in the S&P BSE Sensex. The counter saw huge trading volumes, as around 30 million shares changed hands on the NSE and BSE.

The stock of cigarette major had dropped nearly 7 per cent in Wednesday's intra-day trade, after the government proposed to revise the National Calamity Contingent Duty (NCCD) upwards up to 16 per cent on specified cigarettes.

“National Calamity Contingent Duty (NCCD) on specified cigarettes was last revised three years ago. This is proposed to be revised upwards by about 16 per cent,” Finance Minister Nirmala Sithraman said.

NCCD is about 10 per cent of taxes and increase in NCCD is about 15-16 per cent. Since the overall tax increase is less than 2-2.5 per cent, analysts believe that it leaves enough room for manufacturers to take price increases over and above requirement, in order to mitigate tax increase.

"The net tax on cigarette would increase by Rs 0.07 per stick to Rs 0.12 per stick, which would require 1-2 per cent price hike for cigarette in different categories. The tax hike is not very high and would be easily passed on through a small increase in prices," ICICI Securities said.

The brokerage firm believes ITC witnessed strong volume growth in Rs 10 and above price point cigarette category. It may not tinker with Rs 10 price point brands. It would rather take a price hike in other categories.

Besides, analysts at Phillip Capital believe that the overall increase in tax incidence was only 2 per cent vs expected 7-8 per cent.

"ITC needs to take a price increase of 2-4 per cent across segments to maintain absolute operating profits. We believe the management is likely to take blended price increase of 5 per cent in FY24, with most of these price hikes directed towards KSFT / RSFT segment, thereby keeping price point of DSFT constant. As a result, operating margin at a segmental level is likely to improve YoY,” the brokerage firm said.

Meanwhile, the board of directors of ITC are scheduled to meet on Friday, February 3, 2023 to consider unaudited financial results of the company for the quarter and nine months ended December 31, 2022. The company said the board will also consider declaration of interim dividend for the financial year ending on March 31, 2023.

Brokerages estimate strong growth for ITC’s FMCG business led by price hikes, strong traction in discretionary categories (due to high mobility), strong growth in education, and stationary business.