Budget 2023: A Moderate Hike Via NCCD Will Be A Positive For ITC, Says Jefferies
Since the government's obligation to meet GST shortfall of states is over, cigarette tax tweaks could be an 'annual affair'.
A relatively moderate hike in cigarette taxes in the budget through a change in National Calamity Contingent Duty will be a positive for ITC Ltd., according to Jefferies,
"While we are not certain, we are inclined to believe that the GST Council will continue to alter the cess, and calculations suggest no pressure to raise taxes," Jefferies said in a note. "This makes the budget a key event for ITC, and an increase (via NCCD) of less than 5% would be a positive."
Since the GST rollout has passed the first five-year period and the central government's obligation to meet the GST shortfall of states has ended, a change in cigarettes taxes could be an "annual affair during budget", the brokerage said in a Jan. 29 note.
"In such a case, tobacco taxation would go back to annual changes, unlike the past few years when the GST Council could have also made changes," it said. "We currently built in about a 5% increase in effective tax in FY24, which is across all heads, i.e., GST and NCCD."
A "stable to moderate tax hike will allow legal industry, led by ITC to gain share from illicit industry as has been the case recently", Jefferies said. "[But] an overall tax hike higher than 5% in FY24 would be a negative, while a steady tax rate would be viewed positively."
Jefferies maintained its 'buy' rating on the company with a target price of Rs 415, implying a potential upside of 20%.
Of the 35 analysts following the stock, 32 recommend a 'buy', and three suggest 'sell,' according to Bloomberg data. The average 12-month return potential of the stock is 11.2%.
Shares of ITC traded 0.8% higher compared to a 0.2% fall in the S&P BSE Sensex as of 11:20 a.m.
