ITC continues decline, hits 3-year low; slips 15% so far in February

Shares of cigarette major ITC were trading lower for the fourth straight day at Rs 200.50, down 2 per cent on the BSE on Tuesday on concerns of earnings growth due to demand slowdown. The stock hit over three-year low and was trading at its lowest level since leap day , 2016.

Thus far in February, ITC has under performed the market by falling 15 per cent after the hike in the National Calamity Contingency Duty (NCCD) announced in the Union Budget this year. In comparison, the benchmark S&P BSE Sen-sex has slipped marginally by 0.22 per cent.

Last week, ITC increased cigarette prices by 10-20 per cent across a number of its brands altogether of its markets.

According to analysts, the tax increase in the Union Budget comes as a negative surprise and is likely to affect earnings growth in the near term. The deceleration in cigarette earnings before interest and tax (EBIT) growth along with the tax hike and continuing demand slowdown reduce the near-term growth visibility.

“Although the price increases do not seem to be substantial, given reduced affordability and demand slowdown it could impact cigarette volume and profitability. In addition, the impact could be higher for key brands moving out of the popular price points”, analysts at Emkay Global Financial Services said in a company update.

Analysts at JP Morgan downgrade ITC to ‘Neutral’ from ‘Over Weight’ post the increased tax incidence on cigarettes announced in the budget. While the brokerage firm expects ITC to largely pass on the tax impact (and maybe even more), it would impact volume growth and weigh on stock multiples, restricting stock upside from current levels over subsequent 6-12 months.