Post Corporate Tax Rate Cut Impact on Valuation of ITC Ltd

Introduction

In this article, we are going to discuss ITC Ltd stock valuation analysis post corporate tax rate cuts by considering valuation factors like Revenue growth, PBT growth, PAT projection, PE ratios and Market Capitalisation etc.

ITC Ltd Stock Valuation Analysis | Post Corporate Tax Rate Cut Impact

• As we have discussed in our earlier article, Finance Minister Nirmala Sitharaman announced the corporate tax rates cut on Friday, 20th September. The step has significant positive implications for corporate profitability, the broader economy and market valuations.
• With the enhanced profitability of the corporates, companies can either pay higher dividends or use their retained earnings for the business expansion.
• Thus, the capital expenditure and investments by the corporates can lead to a big growth in coming quarters. So, we can clearly get the how important is this structural reform done by Government of India.
• BSE Sensex rallied almost 3300 points in just 2 days (1900 points on Friday + 1200 points on Monday) and closed at 39,090.03 on Monday, 23rd September.
• Among the 30-pack Sensex, 16 stocks ended in the green and 14 in the red. In terms of index contribution, HDFC Bank, HDFC Ltd, ICICI Bank and ITC Ltd. were the top stocks.

Lets discuss the impact of corporate tax rate cut on ITC Ltd stock valuation in detail.

ITC Ltd Valuation Analysis

• ITC is one of India’s foremost private sector companies with a market capitalisation of Rs. 3.13 Lakh Crore.
• ITC has a diversified presence in FMCG, Hotels, Packaging, Paperboards & Specialty Papers and Agri-Business.
• We are doing the valuation analysis of the stock on the basis of following valuation factors : Revenue Growth, Profit Before Tax (PBT) Growth, PE Ratio, Market Capitalisation, etc.

CAGR Growth of Revenue & Profit Before Tax (PBT)

• Here, we have calculated the CAGR growth of revenue and Profit Before Tax (PBT) of ITC Ltd.
• For FY2018-19 :
  • Revenue = Rs.44,983 Cr
  • PBT = Rs.18,444 Cr
• After calculating the CAGR growth, the lowest growth rate (Here, 6.24%) is taken for further calculations of PBT projections for FY2019-20.
• Thus, PBT Projection FY2019-20 = Rs.18,444 Cr * (1.0624) = Rs.19,595 Cr
• Corporate tax rate of ITC Ltd was 32% earlier. Now, Considering the new reduced corporate tax rate for FY2019-20 ie. 25.17%,
• Profit After Tax (PAT) Projection FY2019-20 = Rs.19,595 Cr (1 – 25.17%) = Rs.14,663 Cr
• (For the detailed calculations, please refer above table.)

ITC Ltd Market Capitalization Projections by considering Historical Average PE Ratios

• The historical average PE ratios for 3, 5 and 10 years are 30.49, 31.26 and 30.90 respectively.
• So we have calculated the future market cap projections of ITC Ltd by considering those PE ratios also.
• However, by considering the realistic expectations from the market, we have to consider the current PE Ratio of ITC Ltd for calculating its market cap projection.
• Thus, Current PE = 24.69 and PAT FY2019-20 projection = Rs.14,663 Cr
• Market Cap Projection of ITC Ltd stock = 24.69 * Rs.14,663 Cr = Rs.3,62,029 Cr
• While, the current market cap = Rs.3,15,000 Cr
• So, % Growth in the market cap would be = 14.92%
• Thus, ITC Ltd’s market cap can reach up to Rs.3,62,029 Cr by the end of current financial year 2019-20.
• Also, with the active participation of institutional investors for buying ITC stock would suggest the re-rating of the stock. Since, Both the Indices (Sensex as well as NIFTY) have considerable weightage for the stock.