Home >Markets >Mark To Market >A new cigarettes draft bill poses a fresh risk for the ITC stock

Shares of ITC Ltd have staged a noticeable catch-up rally since October-end, increasing by as much as 28%. But in the same breadth, it must be noted that the ITC stock is still 13% away from its pre-covid highs seen in January in 2020.

At the beginning of this financial year, everyone worried about the collapse in ITC’s cigarette volumes owing to the disruptions caused by the covid-19 lockdown. As such, muted volume outlook has been a key worry for the stock this year. Further, with ITC, investors always fear tax rate increases on cigarettes. Moreover, in recent years, environmental, social and governance (ESG) concerns have loomed large for global tobacco stocks, including ITC.

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And as if this isn’t enough, reports say the Centre has prepared a draft bill to increase the age to allow sale of cigarettes and tobacco products to 21 years from 18 years currently. Analysts reckon this is sentimentally negative for ITC, although eventually how implementation pans out remains a key monitorable factor. Among the reported changes proposed in the bill, the penalty for smoking in restricted areas has been increased to 2,000 from 200. Further, trade and commerce in cigarettes or other tobacco products should be in sealed and intact packaging. Additionally, sale of illicit products will lead to imprisonment of up to one year and a fine of 50,000.

In a report on 4 January, Edelweiss Securities Ltd’s analysts said, “Overall, if this draft becomes a law, the cigarette industry would face further headwinds: difficulty in adding newer consumers due to the increase in minimum age to buy cigarettes and tobacco products, and impact on cigarette volumes due to sale of only sealed and intact packs."

The brokerage also added, “Sale of loose cigarettes is still widely prevalent in states where this regulation has come into effect. Hence, in our view, it would be difficult to monitor and implement this law. On the other hand, illicit cigarettes and tobacco products, which were thriving due to heavy taxes on legal cigarettes, will take a hit due to stricter punishments proposed in this latest draft."

Overall, if this draft gets implemented, it could be an overhang for ITC and an additional concern for the stock.

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