The share price of ITC Ltd. is likely to see pressure should the government hike the cess on cigarettes as reported by BloombergQuint, Morgan Stanley said in a research note.
ITC' outperformance this year factors in easier taxation on cigarettes under the Goods and Services Tax regime, according to the brokerage house. The ITC stock gained over 35 percent in 2017, compared to the 20 percent rise in the S&P BSE Sensex Index.
Taxes on cigarettes under GST are likely to be around seven percent lower, according to Morgan Stanley's estimates. Any additional cess could counter this advantage.
As there has been no official announcement of the cess, the broking firm maintained its ‘Overweight’ rating on the ITC, with a price target of Rs 395 per share.
The 12-month price target on the ITC stock is Rs 367, according to the consensus of 40 analysts tracked by Bloomberg. 90 percent of the brokerages have a 'Buy’ rating on the stock.
Weakness = Buying Opportunity
Morgan Stanley added that any weakness in ITC should be considered a buying opportunity, due to the following reasons:
- It remains unclear, if at all, whether the government may consider increasing taxes now or in the Union Budget.
- Current benign cigarette tax policy is likely an acknowledgement that sharp tax increases have only encouraged a shift towards more harmful forms of tobacco.
- In the base case scenario, expect cigarette volumes to rise 7 percent in the financial year 2018-19.
- Modest price hikes could lead to mid-high teen earnings before interest and taxes growth in the next year.
- Implementation of GST will contribute to tax compliance and offers ITC a chance to increase its market share.
The ITC stock fell as much as 2.9 percent to Rs 327 apiece.