Shares of cigarette makers Godfrey Phillips India Ltd. and ITC Ltd. rallied in early trade on Monday, driven by strong buying interest and optimism around the cigarette business following ITC's June-quarter earnings.
Godfrey Phillips climbed as much as 6.39% to an intraday high of Rs 2,270.90 on the BSE, while ITC gained up to 4.11% to Rs 292.50 apiece.
At 10:30 am, Godfrey Phillips was trading 5.05% higher at Rs 2,242.35, while ITC was up 3.92% at Rs 291.95. By comparison, the BSE Sensex was trading 0.75% higher at 78,678.
The rally in Godfrey Phillips was accompanied by a sharp jump in trading activity. At the last count, around 8.40 lakh shares, worth Rs 187.33 crore, had changed hands on the NSE, while 1.05 lakh shares, valued at Rs 23.53 crore, were traded on the BSE.
"Godfrey Phillips has shown encouraging signs of recovery after a prolonged correction. The stock has bounced from its recent lows with improving volumes, suggesting buyers are gradually returning at lower levels," said Ravi Singh, Chief Research Officer at Master Capital Services .
Singh further said, technically, the price is trying to move above the immediate resistance zone around 2,250. If it manages to sustain above this level, the momentum could strengthen further and open the way for a move towards 2,400–2,500.
"On the business front, the company recently reported weaker quarterly earnings as higher tobacco taxes weighed on profitability. However, cigarette demand remained relatively resilient despite the price hikes, indicating that the underlying business continues to stay stable. Investors can consider accumulating the stock on dips while keeping a close watch on support near 2,100," he added.
ITC's Cigarette Business Drives Optimism
ITC gained after its cigarette business reported an 81% year-on-year increase in revenue to Rs 15,383 crore in the June quarter. The stock also received a boost after Jefferies upgraded it to 'Buy' from 'Hold', citing resilient cigarette volumes.
The brokerage said it was positively surprised by the resilience in cigarette volumes and believes encouraging demand trends could give management greater confidence to implement further price increases. It raised its target price on the stock to Rs 350.
Despite the strength in cigarettes, ITC's overall quarterly performance remained under pressure.
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Consolidated net profit fell 27.1% year-on-year to Rs 3,579 crore, while net revenue declined 14.4% to Rs 16,908 crore. EBITDA dropped 27.9% to Rs 4,514 crore, with the EBITDA margin contracting to 26.7% from 31.7% a year ago.
Outside cigarettes, the company's total FMCG business revenue rose 53% year-on-year to Rs 21,866 crore, while agri-business revenue declined 17% to Rs 8,082 crore.
Brokerages Remain Divided
Jefferies was the most bullish after the results, saying the earnings miss was largely due to calibrated price hikes and multiple portfolio interventions rather than weak demand.
Other brokerages, however, remained more cautious.
Goldman Sachs maintained its 'Neutral' rating and cut its target price to Rs 290, saying the earnings miss was driven by a steeper-than-expected decline in cigarette EBIT, although it highlighted strong FMCG performance and improving paper margins.
JPMorgan also retained its 'Neutral' rating with a target price of Rs 310, noting that the cigarette portfolio reset is underway while the FMCG business continued to post healthy growth excluding staples.
Macquarie maintained its 'Neutral' stance with a target price of Rs 300, saying tax hikes are still being passed on to consumers and management remains focused on preventing migration to illicit cigarettes.
HSBC reiterated its 'Hold' rating and raised its target price to Rs 320, but cautioned that cigarette profitability remains under pressure due to weaker realisations, volume correction and uncertainty around future tax increases.
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