Buy ITC; target of Rs 280: Religare

We believe the 6% excise duty hike on cigarettes in Budget’17 is rational and manageable for ITC as it is in line with nominal inflation growth. We think the hike could aid ITC’s cigarette volumes, and accordingly build in FY17/FY18 volume growth of 2%/4% for the company.

OutlookIn its Union Budget today, the government announced a weighted average excise duty hike of ~6% on cigarettes (same across lengths). Unlike the last few years, we think this increase is rational and in line with nominal inflation growth. This along with ITC’s price hike of 5.2% in Jan’17 would help drive its cigarette volume/EBIT performance. We believe valuations at 25x FY19E are reasonable given a 14.3% earnings CAGR over FY17E-FY19E and a 45%+ ROIC profile. Retain BUY; Mar’18 TP Rs 280 (Rs 270 earlier).