Shares of ITC, which have lost around 6% of their value this January, may remain range-bound till the new government presents Budget 2024 as investors are not expecting Nirmala Sitharaman to make any tweaks in cigarette taxes in the Interim Budget.

“History suggests that election year has never seen a change in taxation in an Interim Budget – at least not since 2004. Our base case builds in a similar outcome; i.e. no tax changes on Feb 1 and hence, the Budget should be a non-event from ITC’s perspective,” Jefferies analyst Vivek Maheshwari said.

Besides GST, which is under the domain of the GST Council, the government also imposes a National Calamity Contingent Duty (NCCD), which may be subject to change during the Budget every year. NCCD accounts for about 12% of overall taxes on cigarettes. There is also a small Basic Excise Duty (BED), which could also be revised in the budget.

Analysts say the new government’s full Budget for FY25 in July would be important for tobacco taxation.

“In fact, after this, there would be another one in a matter of seven months i.e. Feb 25 as the usual Budget cycle kicks in. We currently build-in 5% YoY rise in tobacco taxes for ITC in FY25 and believe that ITC could manage a high-single-digit tax hike also with minimal impact on earnings/volumes, but a D/D hike would be a negative, while LSD would be a positive,” Jefferies said.ITC derives about 75% of its EBIT from cigarettes and therefore any tweaks in cigarette taxes affect the stock.”While ITC trades at reasonable valuations (26x FY25e EPS), we expect the stock to remain range-bound, given near-term volume moderation (c.2% decline in 3Q), tax uncertainty until the final Budget and overhang from potential BAT stake sale,” Maheshwari said.In the base case scenario, Jefferies has a target price of Rs 520 on ITC.

“In our base case, we forecast 7% annual growth in Cigarette EBIT over FY23-26E and 10% growth in FMCG revenues. We use the SOTP methodology to value the ITC cigarette business at 25x Mar-26 earnings, new FMCG at 5x Mar-26 sales, Agri and paperboard businesses at 15x Mar-26 EPS, and hotels at 18x Mar-26 EV/ Ebitda to arrive at our price target of Rs 520,” the brokerage said.

The Nifty stock, which has delivered 25% in the last year has underperformed this month with a 6% downside.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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