Increased cess on cigarettes: ITC loses ₹50K cr in mkt value

MUMBAI: Shares of ITC Ltd tumbled on Tuesday, wiping ₹50,000 crore off the market value of India’s largest cigarette maker, a day after the cess on cigarettes was raised to offset an expected decline in tax revenue after the roll-out of the new indirect tax regime.

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 Goods and Services Tax (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 12.6% lower at ₹284.60 on the BSE. The stock hit a low of ₹276.90 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 363.79 points down at 31,710.99 points. The National Stock Exchange of India’s Nifty index too closed 0.9% down at 9,827.15.

The tax burden on cigarettes is expected to go up by ₹4.8-7.9 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 brokerage lowered its target price to ₹285 a share from the earlier target price of ₹417.

JM Financial estimates that ITC’s annual profits may take a hit of ₹3,500 to 3,600 crore — about one-third of its reported earnings for 2015-16 — if the company doesn’t pass on the rise in cess to consumers. In fiscal 2017, ITC made a profit of ₹10,289 crore, up 10.1% from a year ago

“In reality, this hit (due to the increase in cess) 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,” said the brokerage in a report Tuesday.