Godfrey Phillips Shares Soar 6% Following Positive Q1 Earnings from Rival ITC

On Monday, shares of Godfrey Phillips experienced a notable surge, climbing over 6% to Rs 2,269.90 on the NSE. This upward movement follows a positive sentiment shift in the cigarette sector, prompted by the recent quarterly earnings announcement from rival ITC. ITC’s report highlighted a 27% year-on-year decline in standalone net profit for the April-June quarter, amounting to Rs 3,579 crore, contrasting with a revenue increase of 28% to Rs 26,943 crore. Such performance has encouraged brokerages to reassess their outlook on the cigarette industry, viewing it as a potentially lucrative investment horizon post-tax disruptions earlier this year.

ITC’s cigarette division reported an impressive revenue spike of 81% year-on-year, reaching Rs 15,384 crore, though overall cigarette volumes saw a decline of 5%, which was less than anticipated. Notably, Nomura has upgraded ITC’s stock rating to ‘Buy’ from ‘Reduce’ and raised the target price to Rs 340, suggesting a significant upside potential. The brokerage posits that the worst impacts of the recent tax hike appear to be abating, bolstering the prospect of improved earnings before interest and taxes (EBIT) per stick, aided by forthcoming price adjustments and product mix enhancements.

In contrast, JM Financial noted the resilience of ITC’s cigarette segment amidst ongoing regulatory hurdles. While Motilal Oswal adopted a more cautious stance, highlighting that the effects of tax adjustments are still unfolding and emphasizing the slow normalization due to competition from illicit markets. This suggests potential ongoing volatility in EBIT performance across the sector in the near term, requiring vigilant monitoring by investors.

Although Godfrey Phillips’ shares have shown intermittent gains, it remains more than 2% down year-to-date, and a comprehensive assessment reveals a 23% decline over the past year, albeit with attractive long-term returns of 231% over three years and 550% over five years. This disparity signals an evolving landscape for tobacco and cigarette stocks, with short-term challenges likely continuing but optimistic long-term perspectives as market conditions stabilize following substantial tax reforms.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)