ITC Shares Downgraded: Emkay Global Cites Weak Margins and Slowdown as Key Issues

ITC shares were downgraded by Emkay Global Financial Services because of short-term business issues like lower cigarette margins, weak demand in the paper business, and a slowdown in the agriculture sector.

Ratings Downgrade and Target Cut

Emkay Global downgraded ITC shares from ‘Buy’ to ‘Add’ and reduced the target price from ₹510 to ₹460 per share. They expect additional pressure from increased competition and a possible tax hike in the Union Budget to fund populist measures.

Impact of Inflation and Tax Hike

The brokerage firm expects inflation to impact margins by 100 basis points (bps), though some of this will be mitigated by a focus on premium products and cost efficiency. “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.

Future Projections

Emkay Global expects a 7% tax hike and a 3% price increase for FY25, leading to a contraction in ITC’s EBIT margin by 60 bps year-over-year to 73.3% of net sales. However, they anticipate margin recovery in FY26.

Despite inflation, ITC’s competitive position is seen as a positive. The company aims to improve its last-mile execution, which should enhance realizations but have a limited effect on reported margins.

Key Watch Points and Long-Term Outlook

“The upcoming Union Budget under the new government and surge in competition from single brands are key near-term concerns. The hotels’ demerger is expected to conclude in Q3FY25, after all approvals. Despite near-term stress, we remain positive on ITC over the medium term and maintain an ‘Add’ rating with a target price of ₹460 per share for March 2025,” Gupta added.

ITC’s share price has risen by 7% in the past three months but is down more than 5% year-to-date (YTD). As of 10:50 am, ITC’s share price was trading 1.16% higher at ₹435.30 per share on the BSE.