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Does ITC Still Make For A Good Puff?
A double-digit hike in excise duty and a shrinking Ebit margin has led to pessimism about its cash cow business

Harendra Kumar
Managing director, institutional equities, Elara Capital

ITC’s Ebit margins from its cigarette business pretty much drive the company but volume has not grown in the past four years. Worse, where the market was expecting a 15% hike in excise duty in the Union Budget, a 25% increase was enforced instead. And with the company taking a price hike to support margins, volume is likely to crash; when the excise duty was hiked in July 2014, ITC lost 7% in volume terms. Given the intent of the current government to curb cigarette consumption, further excise hikes in future are likely. Also, on account of the recent hike, absolute Ebit will fall from 15% in FY14 to 6% in FY16, though Ebit margins will go up with the price hike. Poor earnings visibility and uncertainty has put ITC’s long-term growth in jeopardy. The PE multiple will compress and there will be a lot of valuation challenges. RoE, too, will fall from 35% in FY15 to 33% in FY16, which is why we have downgraded our rating for ITC to ‘reduce.’


Nischal Maheshwari
Research head, wholesale capital markets, Edelweiss

ITC is still the dominant cigarette producer in India, with a 74% market share. Also, demand for cigarettes is inelastic given that people won’t stop smoking overnight, so, the company has the ability to pass on excise duty hikes to consumers. ITC has also been able to maintain and improve its margins over the past few years. In the cigarette business, it has strong cash flows, an excellent distribution network and brand equity. So, ITC’s cigarette business will remain its cash cow. Also, around 74% of cigarette consumption happens through the sale of loose cigarettes; the government tried to ban this — which could have hurt ITC — but had to roll back the order. Irrespective of excise hikes, I think ITC will grow at a CAGR of 15% for the next five to 10 years. In terms of valuation, the stock is pretty cheap and is trading at 20X FY17 EPS, while most stocks in the sector are near 30X. I predict that it will continue to deliver a RoE of 50-60%.

The Inside Story

SS Saraogi, Reliance Industries

  • Sold 9,000 shares @ Rs 838 per share
  • Holds 0.01% stake

AM Naik, Larsen and Toubro

  • Sold 350,000 shares @ Rs 1837.70 per share
  • Holds 0.12% stake

Anant Bajaj, Bajaj Electricals

  • Bought 370,000 shares @ Rs 215.35 per share
  • Holds 4.45% stake*

Sunita Goenka, DB Realty

  • Bought 29,000 shares @ Rs 81.65 per share
  • Holds 0.38% stake*

Pradeep K Jain, Parsvnath Developers

  • Bought 300,287 shares @ Rs 25.87 per share
  • Holds 26.17% stake*

GVK Reddy, GVK Power and Infrastructure

  • Sold 49,287,339 shares @ Rs 9.84 per share
  • Holds 8.35% stake*

*Note: Promoter’s stake in personal capacity. This holding does not include other investment companies and persons acting in concert. Insider trades from 28 February to 3 March

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