ITC share price has jumped about 50% in the last year, but the stock may get a setback if the government raises tax on cigarettes in the upcoming Union Budget 2023. Brokerage firm Prabhudas Lilladher expects a 5-10% hike in cigarette excise duty in Union Budget 2023. Note that the last tax hike was announced three years ago. According to analysts at Institutional Equities, any tax hike on cigarettes beyond 12% may have an adverse market dynamic impact allowing space for illegal cigarettes to occupy market share. Jefferies expects momentum in the cigarette business to continue, with ITC delivering 15% cigarette EBIT growth in FY23 and 10% in FY24.
ITC stock call: Near-term outlook cautious
Although the probable tax hike is keeping Nuvama cautious on the ITC stock for the near-term, it retains ‘BUY’ rating on the counter with an unchanged target price of Rs 400. The brokerage noted that from FY13 to FY17, duty on cigarettes increased sharply at a CAGR of 15.7%, but tax revenues from cigarettes grew a mere 4.7% CAGR. Thereafter, relative stability in taxation was observed until January 2020, with revenue collections growing 10.2%. “Union budget in Feb-23 however does create some near-term uncertainty on a potential change in tobacco taxation – our base case builds in a 5% on-year tax hike in the upcoming budget,” said Jefferies.
Sharp tax hike in Budget 2023 could push consumers to smuggled cigarettes
Earlier, in the Union Budget for FY21, the centre increased the National Calamity Contingent Duty (NCCD) by 2-4 times across cigarette stick sizes, resulting in tax hikes of 9-15%. A sharp tax hike beyond 12% in the upcoming Budget could push consumers to smuggled cigarettes, Nuvama noted. “The share of legal cigarettes in total tobacco consumption declined from 21% in 1981-82 to a mere 8%. Despite accounting for less than one-tenth of the tobacco consumed in the country, duty-paid cigarettes contribute more than four-fifths of the revenue generated from the tobacco sector,” it said, adding that there has been a laudable recovery in legal cigarette volumes this year, but noted that most other parts of consumption have seen sharp inflation in the past three years.
Consumers likely to accept below 12% hike in cigarettes tax
Analysts believe that consumers are likely to accept a moderate hike in cigarettes tax (below 12%). “After a bumper Q2FY23, tax hikes keep us cautious for the near-term, hence the Union Budget on February 1 will be a key monitorable. After the surprise rate hike in GST few years back, there has been no change in rates during the GST regime. However, the NCCD tax hike announced during the union budget 2020 raises risk of a hike,” they said.
ITC share price target: Stock may head up towards this level in coming sessions
Brokerage firm ICICI Securities has ITC in its Weekly Future recommendations. In the current volatile scenario, analysts expect fund flows to move towards a relatively stable sector like FMCG. Within the pack, ITC has shown relative resilience in the recent market volatility. The stock has been consolidating in the broader range of Rs 325-360 over the past two months. “Currently, it is trading near its lower band, which provides an opportunity for fresh longs. On the options front, Call unwinding was seen in ATM and near ATM strikes, which is a positive sign while on the downside, the highest Put base is at 320, which should act as immediate support, they said. ITC is expected to witness a fresh up move towards its higher band of Rs 360 in the coming sessions.
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