ITC shares hit a new high post budget. What is next?

When it comes to the Union budget, the one stock that is always in focus is ITC Ltd. Shares of the cigarette maker have soared approximately 7% over two days, hitting a fresh 52-week peak of ₹510.65 on the National Stock Exchange on Wednesday.

What’s behind this remarkable uptick? It’s simple: the Union Budget for 2024-25 has left tobacco taxes unchanged, providing ITC with much-needed relief.

"We note that the last tobacco tax hike was about 2% in February 2023. This should allow ITC to focus on volume by taking minimal product price hikes and hence a key positive," noted Jefferies India analysts in their report, No News is Great News.

The cigarette business has remained ITC’s mainstay, contributing nearly 40% of total standalone gross segmental revenues in FY24 and approximately 80% of its total segment Ebit (earnings before interest and tax). 

A stable tax regime fosters volume growth for the organized sector. “A lower/stable tax structure also aids the legal cigarette industry in combating competition from illicit cigarettes (about 20-22% of industry versus 13% in 2007), helps win back volumes and also supports revenue to the exchequer," said a report by Nomura Global Markets Research.

With clarity on cigarette taxation, analysts at Jefferies believe that ITC is well-placed to accelerate cigarette revenue growth through a blend of volumes, price hikes, and better mix.

In the immediate future, investors will look to the June quarter (Q1FY25) results for further cues, though expectations remain modest. Analysts from Nuvama Institutional Equities anticipate ITC’s cigarette volumes to have grown 2-3% year-on-year in the June quarter (Q1FY25), consistent with the subdued volume growth seen in the second half of FY24. In fact, the cigarette Ebit growth was muted in the second half of FY24.

Nuvama has also forecast a 7.2% year-on-year growth for ITC’s FMCG (fast-moving consumer goods) business in Q1FY25, with margins expected to remain stable. In the March quarter, ITC’s FMCG business revenue growth stood at 7% year-on-year. In FY25, improving demand outlook, especially in the rural market bodes well for the entire sector, which should reflect positively for ITC’s FMCG business as well.

Despite recent gains, ITC’s shares have lagged, albeit marginally, the Nifty 50 index so far this calendar year. Valuations are not as expensive compared to some of the peers. Based on Bloomberg data, the stock trades at 25 times estimated earnings for FY26. After hitting a high of ₹510.65 in early trade on Wednesday, the stock gave up a large part of the gains to trade at about ₹496 apiece, just slightly above Tuesday's closing price.

Also read | How ITC and BAT’s divergent diversification strategies flipped the narrative

Analysts expect ITC’s return ratios profile to improve following the demerger of its asset-heavy hotels business. The company’s hotels business demerger is likely to conclude by the end of 2024. Importantly, ITC needs to consistently deliver steady volume growth in the cigarettes business for the stock to sustain its momentum or even re-rate further.