Accumulate ITC; target of Rs 294: Prabhudas Lilladher

What happened

Prabhudas Lilladher upgraded ITC to Accumulate from Hold with a target of Rs 294. ITC reported an 8% decline in cigarette volumes, but earnings before interest and tax rose as the company continued raising prices to pass on excise burden.

Confirmed

Global impact / market context

The upgrade matters because the broker believes the worst is over for ITC. Cigarette volume recovery should be gradual, but downside seems limited given a roughly 50% fall from the peak and a 5% dividend yield, which is cash paid to shareholders.

Analyst inference

ITC is working through higher excise duty, which is a tax on cigarettes, by raising prices. The broker estimates 75-80% of that burden has been passed on. FMCG growth and margins were positive across Food, HPC and Stationery, though rising input costs need watching.

Analyst inference

What to watch

1. Watch whether demand trends stay steady and whether any potential increase in cigarette duty is announced, since higher duty would add to the tax burden ITC must recover through prices. Confirmed
2. The broker proposes that steady recovery should continue as ITC passes on more of the excise burden, and that the paper business should gain from extension of MIP, which means minimum import price. Proposed
3. Watch FMCG margin trajectory given rising input costs, and cigarette volume recovery, which the broker expects to be gradual; both affect profit per sale and the pace of earnings recovery. Analyst inference

Evidence

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