ITC shares rebounded sharply from the day's low to trade with 2 percent gains in the afternoon session on February 1, after analysts assessed the tax hike announced by the Finance Minister on cigarettes is not very high and can be easily passed on to customers.
Finance Minister Nirmala Sitharaman presented the Union Budget 2023-24 on February 1.
The stock fell as much as 6.5 percent intraday to hit a day's low of Rs 329 on the NSE after the FM said the National Calamity Contingent Duty (NCCD) on specified cigarettes is proposed to be revised upwards by about 16 percent.
The NCCD on specified cigarettes was last revised three years ago, the FM said while addressing the Parliament.
The ITC stock recovered more than 11 percent from the day's low and hit an intraday high of Rs 365.70. At 13:28 hours IST, it was quoting 1.2 percent higher at Rs 356.6 amid volatility.
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The cigarette segment contributes more than 40 percent to the total business for ITC and the rest of the revenue comes from FMCG, paper and hotel businesses.
ICICI Direct said the net tax on cigarettes would increase by Rs 0.07 per stick to Rs 0.12 per stick, which would require a 1-3 percent price hike for cigarettes in different categories.
The hike in taxes is not very high and would be easily passed on by a small increase (1-3 percent) in prices, the brokerage said.
The 16 percent hike in NCCD duty rate directly translates into a tax hike of 1.5 percent - including the impact of price hike (due to cascading taxes), overall tax hike comes to around 2 percent. This is a clear positive for ITC," Jefferies said in its note.
With effect from February 2, 2023, the government has decided to increase the NCCD duty rate on filter cigarettes of length not exceeding 65 mm as well as cigarettes of length exceeding 65 mm but not exceeding 70 mm, from Rs 440 to Rs 510 per 1,000 sticks.
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The duty rate on filter cigarettes of length exceeding 70 mm but not exceeding 75 mm has been revised upwards from Rs 545 to Rs 630 per 1,000 sticks, while for other cigarettes, the duty rate increased to Rs 850 per 1,000 sticks, from Rs 730, and for cigarettes of tobacco substitutes, the new rate would be Rs 690 per 1,000 sticks, up from Rs 600 earlier.
Further, other than filter cigarettes, of length not exceeding 65 mm, the new duty rate would be Rs 230 per 1,000 sticks, up from Rs 200 earlier and for the length between 65 mm and 70 mm, the rate increased to Rs 290 from Rs 250 per 1,000 sticks.
Technically, ITC stock has formed a high wave kind of pattern on the daily charts. After taking support at around Rs 325 - Rs 327, overall, it has been in an uptrend, rising nearly 9 percent so far in the last couple of weeks.
Among others, Golden Tobacco also rebounded, rising 2.2 percent, whereas Godfrey Phillip remained under pressure, down 4 percent.
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