GST helps ITC enter the 'Rs 4-lakh crore market cap' club

Key Highlights: 

• Finance Ministry removes additional excise duty on cigarettes under GST regime
• ITC market capitalization touched Rs 415,804.92 crore
• Q4FY17 cigarette gross sales increased by 6.5% for ITC

Cereals to cigarette maker ITC Ltd is now a Rs 4-lakh crore market cap company. 

On Monday, share price of ITC Ltd rose 6% after the government issued a clarification on excise duty structure on cigarettes stating that they will no longer have additional excise duty.

What this means is that additional excise duty on tobacco, pan masala and cigarettes has been removed. 

Nillai Shah and Indira Badrinarayan  of Morgan Stanley said, "We expect the stock to react positively to this development,even as clarity on NCCD is likely to emerge over the next few days."

On Monday, ITC Ltd's market capitalisation stood at Rs 4,15,804.92 crore, following HDFC Bank at Rs 4,26,814.20 crore and Reliance Industries with Rs 4,50,049.22 crore. Tata Consultancy Services (TCS) continues to lead with market cap of Rs 4,67,661.37 crore.

Credit Suisse, in its report said, “ITC trades at 32% discount to Hindustan Unilever as compared to an average of 20% over the past ten years. We thus see significant scope for further re-rating in ITC as the earnings momentum comes back to the high teens trajectory that ITC had before FY14.”

ITC has given nearly 11% returns in last three trading session.

Credit Suisse maintains 'outperform' rating on ITC. 

Under GST, taxes are levied on demerit and luxury goods over and above the peak GST rate of 28%. The cess on tobacco will vary from 71-204%. 

Filter and non-filter cigarettes not exceeding 65 mm will have a cess of 5% plus Rs 1,591 per 1,000 sticks. While, Non-filter cigarettes exceeding 65 mm but not exceeding 70 mm have cess of 5% plus Rs 2,876, while for filter cigarettes the levy is 5% plus Rs 2,126 per thousand sticks.

For ITC, cigarettes are still a cash cow. 

Q4FY17 cigarette gross sales increased by 6.5% and EBIT increased by 8%, on 110 basis points margin expansion in ITC. 

Hikes in cigarette taxes during last three years (FY16, 17, 18) were 13%, 10% and 6% respectively, compared to more than 20% annual hikes in the previous three-year period. The GST rates continue this trend by lowering the rate of taxes for the first time, as per Credit Suisse.

Richard Liu and Vicky Punjabi, analysts at JM Financial said, “For every rupee of profit that the cigarette business earns, the government makes 3.4x. ITC contributed $5 billion (Rs 32,500 crore approx) to the Exchequer in FY17 through excise, state-taxes, income-tax, DDT – these now account for 74% of the value-added by the company.''