Systematix Lowers ITC Share Target on Volume Concerns
Systematix Institutional Equities has significantly revised its outlook for ITC Ltd, cutting revenue and earnings per share (EPS) estimates by 24 percent. The brokerage firm now anticipates an 8-10 percent decline in ITC's cigarette volumes during the first half of the fiscal year 2027. This projection has led to a revised target price for ITC shares, moving from Rs 340 to Rs 310, while maintaining a 'Hold' rating on the stock.
The analysis by Systematix, based on channel checks, also suggests a sharp fall in net realization for ITC in the June quarter. Overall, the firm predicts a 5 percent decline in volumes and an 11 percent drop in net sales for the full FY27.
Factors Behind Expected Decline
The anticipated volume decline is attributed to several factors, including recent substantial price hikes. Cigarette prices saw a blended increase of 25 percent over February-March, with the Regular (69mm) segment rising by 20 percent and the Kings' (84mm) segment by 30-35 percent.
Furthermore, significant channel inventory build-up occurred in January-February, which is now being drawn down. At the distributor level, Kings' volume sales have seen a sharp decline of 20-30 percent over the past 2-3 months, while the Regular segment is faring slightly better, with sales ranging from flat to a 10-15 percent decline. End-consumer volumes have also decreased by a lower 5-6 percent, particularly in the Kings' segment.
Systematix expects primary channel inventory to normalize over the next 2-3 months, with secondary volumes stabilizing as consumers revert to their habitual consumption patterns.
Historical Precedent and Company Strategies
This isn't the first time ITC has faced such challenges. In FY15 and FY16, the company's cigarette volumes each declined by 8 percent. This was primarily a result of a 72 percent Basic Excise Duty (BED) hike on longer cigarettes in the Union Budget 2014, coupled with mid-teen price increases. The stock performance also reflected these pressures, declining 8 percent in FY15 and remaining flat in FY16.
Regarding future pricing, distributor feedback is mixed, with some indicating a potential further price hike of 15-18 percent across segments, while others report no such intimation from cigarette companies. In response to inflationary pressures, companies are reportedly launching shorter cigarette lengths to maintain older price points and soften the financial impact on consumers. This strategy, while affecting the product mix, prioritizes the preservation of consumer demand.
Adding to the market complexities, the illicit cigarette segment, which accounts for 20-25 percent of the market, continues to flourish despite government crackdowns.