ITC shares: Emkay Global downgrades rating, cuts target price on near-term headwinds

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ITC shares to ‘Add’ from ‘Buy’ and also cut ITC share price target to ₹460 apiece from ₹510 earlier, as it sees likely additional pressure from the surge in competition, and expectations of higher tax hike in the Union Budget to fund populist measures.The brokerage house sees 100 basis points (bps) margin impact from inflation, which would partially be absorbed in mix thrust (premium continues to do well) and cost efficiency. Also Read: FMCG stocks likely to see valuation re-rating, says Emkay Global; upgrades HUL, Nestle"Ideally, this kind of inflation should be passed on to consumers, but historical precedence does not suggest so.

In this setting, a tax hike under the new government would be key, where a pass-through of tax and inflation in leaf tobacco would be tough, given the volume pressures," said Nitin Gupta, Senior Research Analyst at Emkay Global Financial Services.With a focus on volume, the brokerage firm has built the case for a 7% tax hike and a 3% price hike for FY25. It sees ITC’s EBIT margin contracting 60 bps YoY in FY25 to 73.3% of net sales, after which it builds margin recovery in FY26.The only positive Emkay Global sees in this inflationary setting is the enhanced competitive position of ITC.

Additionally, the company is looking to improve its last mile execution, which was indirect earlier. This move is likely to reflect on better realization but has a marginal bearing on the reported margin, Gupta said.Also Read: Cochin Shipyard, NBCC, BEL, NTPC among other PSU stocks rally up to 8%; Nifty CPSE jumps 4%“The upcoming Union Budget under the new government and surge in competition from the single brand are key near-term watch outs.