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Event update: ITC (Outperformer); Union Budget – No major increase in taxation a relief…

Event

The Union Budget has brought tobaccos products, including cigarettes, under the central excise duty net and has proposed nominal central excise duty across cigarette segments.

Key details

• Tobacco products attract National Calamity and Contingent duty (NCCD) and in certain cases this levy has been contested on the ground that there is no basic excise duty applicable on these items. This budget is addressing this anomaly and has introduced a nominal excise duty component on cigarettes/tobacco products.
• As per Union Budget 2019-20, government has imposed central excise duty of Rs5/1000 sticks for all filter cigarettes of length up to 75mm and Rs10/sticks for others (>75mm).
• There has been no change in NCCD across slabs.

Our view

Imposition of nominal central excise duty on cigarette segment in the Union Budget is positive for ITC and removes the near term overhang, considering the expectations of high increase in taxation after no hikes in the GST council meet. While this also brings an additional element, wherein government can increase tax in budget too, however, the basis for introduction is more to address the issue of NCCD levy getting contested in tobacco products. As a result, we believe, any major taxation led changes are more likely to take place in the GST council meeting. ITC’s volume growth has suffered in the past few years, impacted by the punitive increase in taxes/duties, which forced it to disproportionately raise prices. We are factoring a 4% cigarette volume CAGR and EBIT growth of 10%/11% in FY20/21E and our earnings estimates remain unchanged. With the stock trading at 25x/22x FY20E/21E EPS, which is at a 40% discount to our consumer coverage universe, valuations are attractive for earnings CAGR of 11.3% over FY19-21E. We believe risk reward is favourable and maintain our Outperformer rating on the stock. Key monitorable will be subsequent GST council meetings where the change in cigarette cess could be announced.