ITC shares bear brunt of cigarette cess hike
Mumbai: Shares of ITC Ltd tumbled on Tuesday, wiping Rs50,000 crore off the market value of India’s largest cigarette maker, a day after the cess on cigarettes was increased to offset an expected decline in tax revenue after the rollout of Goods and Services Tax (GST).
At least six securities houses—CLSA India Ltd, JM Financial Ltd, Morgan Stanley, Credit Suisse Securities (India) Ltd, IIFL Holdings Ltd and ICICIdirect.com—cut their ratings of the stock and slashed target prices, citing a weaker earnings outlook after the move by the GST Council.
Some also see the unexpected increase in tax as a signal that taxation on cigarettes will remain punitive and uncertain.
ITC shares closed 12.63% lower at Rs284.60 on the BSE. The stock hit a low of Rs276.90 a share on the BSE and fell as much as 14.99% during the day. Other cigarette companies Godfrey Phillips India Ltd fell 5.7% and VST Industries Ltd declined 7.8%.
The sharp fall in ITC pulled the BSE Sensex down 1.13%, its sharpest fall in seven months. The benchmark index closed lower by 363.79 points at 31,710.99 points. The National Stock Exchange’s Nifty index, too, closed down 0.9% at 9,827.15 points.
The tax burden on cigarettes is expected to go up by Rs4.8-7.9 per 10 sticks, depending on their length and whether or not they have filters, after the GST council’s move to raise the cess.
A “price hike would be required to grow earnings which may also impact volumes”, CLSA wrote in a note to clients. “The outcome is clearly negative from the neutral stance that the government always mentioned.” The brokerage lowered its target price to Rs285 a share from the earlier target price of Rs417.
JM Financial estimates that ITC’s annual profits may take a hit of Rs 3,500-3,600 crore— about one-third of its reported earnings for the just-ended financial year—if the company doesn’t pass on the increase in cess to consumers. In fiscal 2017, ITC made a profit of Rs10,289 crore, up 10.1% from a year ago
“It’s shocking that after having stated publicly for so long that all taxes are intended to be kept ‘revenue-neutral’, the GST Council went ahead and tinkered the structure in a manner that leads to an 8-16% hike in total indirect taxes on cigarettes,” the brokerage said in a report on Tuesday. “In reality, this hit would be passed on to consumers through price hikes—we estimate the need to do so by 15-16% in the Kings segment and 8-10% in the rest of the portfolio.”
Morgan Stanley cut its rating on ITC to “equal weight” from “overweight” and reduced its target price to Rs285 a share from Rs310.