ITC’s stock jumped 6 per cent on Monday on the NSE and was the second-biggest gainer among the Nifty stocks.

The Goods and Services Tax, which took effect from July 1, has thrown up a positive surprise for the company by excluding basic excise duty and additional duty and including only GST of 28 per cent, ad valorem cess of 5 per cent, specific cess and National Calamity Contingent Duty.

As a result, analysts reckon that ITC’s tax incidence is likely to be lower by 4-7 per cent. More than these matters, the market was relieved that the uncertainty over rates under GST has lifted, and gave the ITC stock the thumbs up.

“GST has not been punitive for ITC as earlier feared,” said Percy Panthaki, analyst at IIFL.

Dull run

ITC’s stock has underperformed Hindustan Unilever over the past three months in the run-up to the implementation of GST. There were fears of higher rates on cigarettes under GST.

ITC is the market leader in cigarettes, with around 80 per cent market share; cigarettes account for close to 60 per cent and 86 per cent of the company’s revenues and segment profit.

ITC will benefit irrespective of whether or not it passes on the benefits to users. Passing on the benefits will help boost its volumes; not passing them on will improve its profitability. IIFL estimates that net sales per stick will increase by 9 per cent if the retail price is unchanged.

Also, GST will impact HUL more in the short term in terms of procurement, manufacturing, distribution, accounting and taxation and IT & customer development. In others words, HUL will go through more pain in the transition phase than ITC, according to analysts.

Thirdly, HUL’s valuation, at 48 times FY18 price to estimated earnings, is way more steep compared to ITC’s 34 times. While both are far away from their 10-year average P/E of 31 times and 25 times, respectively, HUL is much farther out than ITC from its historic average. ITC’s stock is therefore expected to outperform HUL in the short term.

Based on analysts’ estimates on target price at ₹382, there is an upside potential of 11 per cent on the ITC stock. Morgan Stanley has given an “outperform” rating on the stock, while IIFL has maintained its “buy” recommendation.

More positive triggers

However , Hindustan Unilever provides more positive triggers than ITC over the longer term, such as an anticipated recovery of the rural economy on the back of good monsoons, premiumisation strategy and the company’s foray into product lines. The company expects growth to revive and margins to expand in FY18 for these reasons.

Kotak Institutional Equities likes HUL due to its consistent delivery of modest margin expansion and sustained premiumisation agenda.“We like the intent, approach as well as recent execution,” it noted

“We believe HUL is a quality franchise to own with much better internals (free cash flow generation/return on equity) versus many of its peers,” it added.

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