18 July 2017
TP: INR 280 (-2%)
Downgrade to Neutral
New GST rates a huge dampener
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Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
353 / 222
Financials Snapshot (INR b)
2017 2018E 2019E
396.4 436.8 483.3
145.8 158.1 176.5
102.0 112.6 125.5
Adj. EPS (INR)
EPS Gr. (%)
Div. Yield (%)
Shareholding pattern (%)
Mar-17 Dec-16 Mar-16
FII Includes depository receipts
On 17 July 2017, the Indian government announced the new GST rates
applicable on cigarettes. The tone of the GST Council’s press release
appeared to indicate a reversal to neutral GST levels, from the earlier
indication of beneficial rates for ITC after the abolishment of additional
excise duty (as per the 1 July announcement). However, a closer look at the
latest press release indicates that the revised GST rates are higher than the
erstwhile indirect tax rates, and also much higher than the assumed GST
rates after the announcement on 1 July 2017.
Post new rates, there is (also refer Exhibits 1-4):
7% increase in tax incidence in the sub 65mm segment over the pre-
GST levels (+14% over earlier assumed GST levels).
5% increase in tax incidence in the 65-70mm segment over the pre-
GST levels (+15% over earlier assumed GST levels).
6% increase in tax incidence in the 70-75mm segment over the pre-
GST levels (+13% over earlier assumed GST levels).
11% increase in tax incidence in the >75mm segment over the pre-GST
levels (+17% over earlier assumed GST levels).
Assigning weights to each segment based on percentage of sales (refer
Exhibit 5), we get a weighted average increase of 6.2% on tax incidence for
ITC over pre-GST levels and a 15% increase compared to the earlier
assumed GST rates.
What does it all mean for ITC?
Until now, we were expecting price reduction and volume growth;
however, post the revised GST rates, we expect ITC to take a price
increase to pass on the impact of the higher effective rates. We have
reduced FY18/FY19 cigarette volume growth forecasts from 6%/7% to
Cigarette EBIT growth assumption for FY18/FY19 reduces from
14%/20% earlier to relatively moderate 10%/12% levels now. EPS
growth for FY18/FY19 has also been revised to 10.4%/11.4% from
Valuation and view:
In our view, if the government had earlier clearly
indicated that the effective increase over pre-GST levels will be only 6%, the
street probably would have taken it positively. However, since there has
been a major deviation from (i) initial government commentary of neutral
GST rates for cigarette companies and (ii) subsequent indication of
beneficial rates, the new high rates announced yesterday have turned out
to be a massive dampener for earnings expectations and even more for
investor sentiment. This, in turn, will affect valuation multiples assigned to
the stock. We reduce our EPS forecasts by 4%/11% for FY18/FY19, and also
cut our target multiples to 26x June 2019E EPS (10% discount to three-year
average) from 31x earlier. This results in revised TP of INR280 (INR380
earlier) and rating downgrade to
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 6129 1545
(Vishal.Punmiya@MotilalOswal.com); +91 22 6129 1547