ITC shares fall 10%: Firm may hike cigarette prices by at least 15% to offset new excise duty, says brokerage

ITC shares fall 10%: Firm may need to hike prices by at least 15% to offset new excise duty on cigarettes, says brokerage

• Tobacco stocks fell after India imposed new excise duty on cigarettes
• ITC shares down 10%, Godfrey Phillips fell 18%, VST Industries dropped 5.3%
• New tax may force ITC to hike cigarette prices by at least 15 percent

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Shares of tobacco companies fell on January 1 after the government imposed a new tax on cigarettes, making them costlier for an estimated 100 million smokers in India. The selling pressure was so high that ITC shares fell 10% to hit near three-year low and were on track for worst day since February 2022. Meanwhile, shares of Godfrey Phillips India and VST Industries fell 18% and 5.3%, respectively.

Finance ministry late on December 31 notified an excise duty of Rs 2,050–8,500 per 1,000 sticks, depending on cigarette length, effective February 1.

Jefferies analysts called the move "a clear negative," saying it would hurt sales volumes and revive concerns about losing share to the illicit industry.

The duty translates into a 22%-28% increase in overall costs for 75-85 mm cigarettes, analysts at ICICI Securities said.

"Cigarettes longer than 75 mm account for roughly 16% of ITC's volumes and are likely to see price increases of 2–3 rupees per stick as a result of the levy," they said.

ICICI Securities, which had earlier recommended going long on ITC January futures, advised investors to close their positions at current levels as a stop-loss is triggered.

Meanwhile, the Jefferies' note accessed by CNBC-Awaaz stated ITC may need to hike prices by at least 15% to offset new excise duty on cigarettes.

"The government has notified a sharp rise in excise duty for cigarettes as the period of compensation cess is about to end. While we are unsure if this is final taxation, it appears so to us.

"We also note that the revised GST rate on tobacco was recently raised to 40%, 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 least 15% to pass on the overall impact to consumers, if not higher," the note stated.

The investment firm's calculations suggest that tax hikes could be over 30% if the national calamity contingent duty continues. Even if this duty is subsumed, the impact could still be well over 20%, it said.

"The current excise duty hike is a substantial near-term deterrent to the cigarette operations of the company, considering the negative impact of increased taxes on the margins of the company. It is also likely to impact the volumes of sales due to prices being forced further upward. Although the company has a diversified business, the sensitivity of earnings to the tobacco sector means the stock price will remain volatile in the foreseeable future due to regulatory changes," said Siddharth Maurya, Founder & Managing Director, Vibhavangal Anukulakara Pvt Ltd.

Currently, a 28% GST and a compensation cess at varying rates are levied on all tobacco products, including pan masala, cigarettes, chewing tobacco, cigars, hookah, zarda, and scented tobacco.

From February 1, the GST rate will increase to 40%, plus an excise duty and a compensation cess.

The GST Council in September last year had decided that the compensation cess will cease to exist after the repayment of loans taken to compensate states for GST revenue loss during Covid. The Rs 2.69 lakh crore loan will be repaid by January 31, 2026.

At the time of the introduction of the GST on July 1, 2017, a compensation cess mechanism was put in place for 5 years, till June 30, 2022, to compensate for the revenue loss suffered by states due to the GST implementation.

The levy of compensation cess was later extended by 4 years till March 31, 2026, and the collection is being used to repay the Rs 2.69 lakh crore loan that the Centre took to compensate states for the GST revenue loss during the Covid period.