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Lower tax may help ITC cut prices, gain market share

Lower tax may help ITC cut prices, gain market share

ITC, a diversified consumer good conglomerate, may be able to lower prices and grab market share from the unorganised players after the government clarified that additional excise duty will no longer apply with GST in force. The change will result in lower taxes of 5-6 per cent for the firm and may make it cut prices, analysts said.

ITC on Monday became the fourth Indian company to cross a market capitalisation of Rs 4 lakh crore behind Reliance Industries, Tata Consultancy Services (TCS) and HDFC Bank.

The other consumer goods giant Hindustan Unilever (HUL) too rose 1.3 per cent to hit record highs. While HUL surged over 5 per cent in the month ahead of the GST, ITC rose over 11 per cent in the past two trading sessions alone. It will be interesting to see how the two fast-moving consumer goods (FMCG) stocks — one an industry bellwether and the other the largest cigarette company — outperform each other under the GST regime.

The Street seems to favour ITC more than HUL. Data from Bloomberg show that while 52 per cent of the analysts tracking the HUL stock have a buy recommendation on it, the proportion is 93 per cent in case of ITC. Under the GST regime, basic excise duty and additional excise duty have been repealed. Now only the national calamity duty (NCCD), GST and cess remains on cigarettes.

“With the two taxes gone, ITC we believe will be able to pass on tax benefits in the form of price cuts in their lower priced 64mm category of cigarettes. This will help the company become more competitive as illegal manufacturers have 22 per cent share in this segment,” said Abneesh Roy, senior vice president of Edelweiss Securities.

ITC soared 5.7 per cent to a record close on Monday on hopes the Goods and Services Tax will boost profitability. VST Industries closed 3.97 per cent higher at Rs 3,733.55 while Godfrey Phillips India closed 1.93 per cent higher at Rs 1,283.7. ITC closed at Rs 342.30 on Monday. Benign GST rates, scope for lowering cigarette prices and attractive valuations seem to be factors in favour of ITC. Analysts estimate of decline in tax burden range from 4 per cent to 9 per cent. This decrease should be instrumental in helping the company push sales.

Up to 35 per cent of ITC’s portfolio is based in the lowerpriced cigarettes, said Naveen Kulkarni, analyst at PhillipCapital, “The clarity in the tax regime means there is no more confusion in terms of VAT and various state taxes. This also means a lower number of supply chain issues.” Cigarettes volume growth in view of increased taxes had been a pain point for the company. The GST rates also put an end to the uncertainty surrounding taxation on cigarettes.

Other factors like lower GST rates in certain consumer staple categories, normal monsoon and seventh pay commission outgo — also commonly impacting HUL — augur positive for the company’s FMCG business.

Even though de-stocking due to GST may have rattled sales in the first half, analysts expect that the company will be able to deliver 5 per cent growth in the coming six months and more than 5 per cent in FY19.

Lower valuations is another key reason why ITC finds favour. Trading at 34 times its FY18 earnings, the ITC stock trades at a 30 per cent discount to the valuations of 49 commanded by HUL. Any shrinking of the valuation gap should see ITC outperforming HUL. The first quarter performance of these companies could provide more hints. Technical analysts expect ITC shares to rise as much as 8 per cent over the next two weeks.

“We’ve been seeing the uptrend in ITC in the last week and it will continue to show a positive movement in the next 10-15 days. We expect the stock to rise up to Rs 365-370 in this period,” said Vikas Jain, senior analyst at Reliance Securities.

 

Source: Economic Times

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