A new year twist for the Tobacco manufacturers. The government notified a new excise duty on cigarettes. This announcement hammered the stock price by as much as 10% with the shares plunging to a new 52-week low of Rs 362.70. While there isn’t sufficient clarity on the final outcome, if confirmed, international brokerage house Jefferies called this a clear negative. They pointed out that as a result of this, “volumes will be impacted and concerns would also re-emerge on risk of losing some volumes to the illicit industry.”
However, Jefferies is yet to make changes to the rating and target price. The brokerage firm has maintained its ‘Buy’ rating, with a target price of Rs 535, looking at an upside of 33%.
Jefferies on ITC: Impact of taxation
The brokerage house said that while it is unsure if this is final taxation, it appears so. “There are still a lot of unknowns, but our calculation suggests a tax hike could be over 30% if NCCD continues; in the event NCCD is subsumed, the impact should still be well over 20%.”
NCCD stands for National Calamity Contingent Duty. It is an additional central tax levied on tobacco products like cigarettes, bidis, and chewing tobacco. The tax is levied to raise funds for disaster relief efforts, acting as a surcharge on excise duty, and directly impacting tobacco’s financial performance due to varying hike announcements in budgets.
Will ITC hike cigarette prices?
The GST rate on tobacco was recently revised to 40%. Now the question arises, what will ITC do to neutralise the effect? Jefferies thinks ITC may need to raise prices by at least 15% to pass on the overall impact to consumers, if not higher.
All in all, assumptions are that if confirmed, this will be a clear negative as volumes will be impacted, and concerns would also re-emerge on the risk of losing some volumes to the illicit industry. However, there is still uncertainty about the final outcome.
ITC’s stock performance
The stock price of ITC has declined by almost 1% in the last five trading days. The stock remained unchanged in the past one month and 3% in the previous six months. ITC’s stock price has fallen 17% over the previous 12 months.