Moneycontrol
Aug 28, 2017 05:24 PM IST | Source: Moneycontrol.com

ITC’s tax bounty goes up in smoke. What should investors do now?

Yesterday, GST council increased the cess on cigarettes so as to keep the tax incidence post-GST at the level it was before the introduction of the new tax regime.

ITC’s tax bounty goes up in smoke. What should investors do now?

Anubhav Sahu

Moneycontrol Research

ITC was identified by us as one of the key beneficiaries of lower GST rates in our report dated May 24. Various clarifications from the Government of India validated the view and ITC was reported to be lowering the prices of cigarettes to pass on the benefits to the consumer.

However, this fiscal policy’s unintended boost was short lived. Yesterday, the GST council increased the cess on cigarettes so as to keep the tax incidence post-GST at the level it was before the introduction of the new tax regime.

On the filtered category of cigarettes, additional cess/tax rates are as follows:

ITC Chart 1

Based on additional duties, tax incidence for the cigarette products of ITC are as follows:

ITC Chart 2

*Assuming 13 percent trading profit

Blended tax incidence comes at around 51 percent which is roughly same as prevailing in the pre-GST era.

For reference, earlier product mix and rates were as follows:

ITC Chart 3

The reversal of stance on tax rates for cigarette companies has been a disappointment and as expected, had a repercussion on stock prices.

But, the debate for the stock should now shift from taxation on cigarettes to the prospects of the other FMCG products in the ITC stable, rural recovery, improvement in channel inventory and new product launches.

While the incidence of taxation has reverted to pre-GST rates, there is definitely an element of clarity that has emerged. The continued fear of states changing taxes individually each year, apart from excise duty increases, has now been substantially reduced. While investors will get greater clarity on the company’s future strategy when the results get announced (July 27), at 29X FY18 projected earnings, ITC remains one of the most reasonably valued stocks in the consumer universe that investors should not miss accumulating on every decline.

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