ITC – Sell or Buy?

The stock of ITC today saw a swift fall during market hours after news hit about the government accepted the proposal to ban sale of single cigarettes. With something to the order of 70% of sales supposedly coming through sales of loose cigarette’s, the knee jerk reaction was not too surprising.

While the thought process is that such a ban shall hit sales, we need to understand a couple of things. One, smoking is a addiction and as things stand, its tough for some one who is addicted to smoking to discontinue just because one cannot buy in loose.

Secondly, ITC despite literally yearly increase in duties has been able to hold on to its margin by increasing the price. What used to cost between 3 to 4 per stick a few years back, now costs around 9 – 10 and yet, the demand is no where lower.

On a personal note, I do think this ban is good. Addiction to cigarette’s generally starts during school / college days. While they would love to have a quick smoke or two, most of them would not dare be caught with a pack by either their parents or their teachers. That in itself should mean that on the long term, we should see something positive coming out of this move.

But as a investor, does the current move offer a opportunity. ITC and in-fact literally much of the FMCG basket has been a under-performer during this rally which has been more about high beta stocks breaking muti-year barriers.

While the 5% fall in itself does not mean its a Buy, the chart seems to suggest that the stock is in very firm hands. The stock is currently trading within a Ascending Triangle and a break out on the upside can be a potential entry point. But a lower risk entry point, especially if this news continues to have impact on the stock price would be when the stock price tests the lower channel line.

Charts below;