Stocks of major cigarette makers ITC and Godfrey Philips saw a massive slump on Thursday after the government announced additional taxes on cigarettes and various tobacco products.
As analytics termed the magnitude of the tax impact worse than anticipated initially, the share price of ITC, the country’s largest cigarette maker, fell 9.7 per cent to end at Rs. 363.90 on the BSE. Among Nifty50 constitutes, ITC emerged as the biggest loser. Shares of Godrej Philips India, the distributor of Marlboro, crashed 17 per cent to Rs. 2,289.65.
According to analysts, the proposed tax increase on cigarettes looks quite large. The current tax structure of 28 per cent GST and ad valorem cess between 5 per cent and 36 per cent is being replaced by a 40 per cent GST and a rise in excise duty.
VOLUME TO TAKE A HIT
The cigarette makers may have to increase prices by 15-20 per cent to pass on some of the new tax impacts to consumers. It would lead to a volume decrease. commenting on the the impact of the additional tax on ITC, Jefferies analysts called it “a clear negative,” as cigarette volume would be impacted and concerns would also re-emerge on risk of losing some volumes to illicit industry.
“The government has notified a sharp rise in excise duty for cigarettes as the period of compensation cess is about to end. There are still a lot of unknowns, but our calculation suggests tax hike would be over 30 per cent if NCCD continues; in the event NCCD is subsumed, the impact should still be will over 20 per cent,” said Jefferies.
“The GST rate on tobacco was recently raised to 40 per cent, which will also have a cascading impact as ITC takes up cigarette price hikes. Basis our understanding, ITC may need to take up prices by at lease 15 per cent to pass on the overall impact to consumers, if not higher,” they observed.
Domestic brokerage Nuvama Institutional Equities said while it expected a sharp tax hike on cigarettes, the magnitude seems higher than anticipated , likely prompting consensus downgrades to ITC’s cigarette volume and EBITDA estimates as well as multiples. “Pending clarity, we reckon a more than 20 per cent price hike and a more than 30 per cent tax hike, which is meaningfully sharp,” Nuvama said. “Overall, we are cutting EBITDA by 7 per cent each for FY27E/28E. Downgrade to ‘Hold’ from ‘Buy’, cutting our Tobacco PE valuation to 17x(earlier 23x),” it added.
Tobacco Institute of India (TII) said it was “shocked and surprised” to note the “unprecedented increase” in duty announced on December 31 given the statements made by the government on more than one occasion, that the overall impact of the transition of taxes will be revenue-neutral.
According to TII, cigarettes are already a highly taxed product in India. Legal cigarettes constitutes only 10 per cent of the total tobacco consumption while contributing 80 per cent of tobacco tax revenue. Cigarette taxes in India as a percentage of per capital GDP are amongst the highest in the World, as per the WHO data.
Source: businessline
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