7 December 2015
Update
| Sector:
Consumer
ITC
BSE SENSEX
25,530
S&P CNX
7,765
CMP: INR314
TP: INR350 (+12%)
Neutral
New challenges on the horizon?
CEA recommends 40% GST rate for tobacco; uncertainty continues
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b) / (USD b)
12M Avg Val ( INRm)
Free float (%)
CEA proposes 40% GST rate for tobacco.
ITC IN
8,015.5
410/295
-4/8/-10
2,516/37.7
2,831
100.0
ITC currently pays ~25% weighted average VAT. If the central GST subsumes the
existing central excise duty, the impact will be minimal.
Earnings downgrade risk; maintain NEUTRAL.
Financials Snapshot (INR b)
Y/E Mar
2015 2016E
Sales
360.8 368.3
EBITDA
134.9 143.5
Adj. PAT
96.1 103.2
Adj. EPS (INR)
12.0
12.9
EPS Gr. (%)
8.5
7.4
BV/Sh.(INR)
38.3
42.9
RoE (%)
33.7
31.7
RoCE (%)
41.8
39.1
Payout (%)
52.1
55.0
Valuations
P/E (x)
26.2
24.4
P/BV (x)
8.2
7.3
EV/EBITDA
17.5
16.3
Div. Yield (%)
2.0
2.3
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Sep-15 Jun-15
0.0
21.0
35.1
43.9
0.0
20.9
35.0
44.1
FII Includes depository receipts
Stock Performance (1-year)
CEA recommends 40% GST rate for tobacco:
In a report, submitted to the
government of India, the Chief Economic Advisor has recommended a
punitive 40% GST rate for demerit goods (tobacco, luxury cars, pan masala,
aerated drinks). Though it is just a proposal, we believe the probability of its
acceptance are strong—given the governments’ hostile stance toward the
2017E
cigarette industry (four consecutive years of 15%+ excise duty hike and
398.0
several other measures to curb cigarette consumption).
157.5
ITC’s weighted average VAT rate ~25%:
ITC currently pays central excise duty
114.1
14.2
(specific in nature) and VAT to state governments. As per our estimates, ITC’s
10.6
current weighted average VAT stands at 24.5%. Thus, if GST of 40% were to
48.0
replace the existing VAT, it will be a significant negative for cigarette volume
31.3
as ITC will look to pass on the impact of higher taxation. Sharp increase in
38.9
excise duty over last four years has impacted the industry volume growth (ITC
55.0
reported three consecutive quarters of double-digit decline in cigarette
volume)
22.1
6.5
Cigarettes will continue to attract central excise duty:
Amongst the categories
14.7
of goods for which punitive GST rate is recommended, central excise duty will
2.5
continue to be levied only on cigarettes; for the rest, GST will subsume excise
duty. Our discussions with industry experts suggest a possibility (no discussion
or concrete decision has taken place) of central GST subsuming the extant
Sep-14
central excise duty levied on cigarettes; tin that event, the impact of higher
0.0
GST rate will be minimal.
20.5
Silver lining?
Our discussions with industry experts also suggest the
possibility of government taking stringent actions to bring illegal duty-evaded
34.8
cigarettes under the tax net, which now form ~20% of the industry v/s 9-10%
44.6
in 2009. This could benefit ITC in the medium/long term if the illegal
segment’s salience comes down.
Maintain NEUTRAL:
ITC’s sluggish performance owing to sustained pressure in
cigarettes will continue even as 2HFY16 provides a benign cigarette volume
base, in our view. We believe the uncertainty around GST and the impending
Union Budget will constrict near-term stock outperformance. While valuations
remain inexpensive at 22x FY17E EPS, continued legislative risks pertaining to
Cigarette industry and government’s hostile stance will prevent re-rating, we
believe. There is a possibility of earnings downside risk if 40% GST rate
recommendation is accepted. Thus, we maintain NEUTRAL despite inexpensive
valuations.
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Manish Poddar
(manish.poddar@motilaloswal.com); +91 22 3027 8029
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.