Shares of India’s largest cigarette maker, ITC, suffered their steepest single-day decline in nearly six years on Thursday, with shares crashing 10% and wiping out over Rs 50,000 crore in market capitalisation after the Finance Ministry imposed a sharp new tax on cigarettes late on Wednesday.
The stock plummeted to a fresh 52-week low of Rs 362.7 during the session as investors scrambled to assess the damage from excise duty rates that could force price increases of at least 15%.
Godfrey Phillips India, which sells Marlboro cigarettes in the country, fared even worse, crashing as much as 19% in its steepest fall since November 2016.
The carnage followed the finance ministry’s notification of excise duties ranging from Rs 2,050 to Rs 8,500 per 1,000 cigarette sticks, depending on length, effective February 1. The levy comes on top of the existing 40% Goods and Services Tax (GST), creating a cascading impact that has analysts warning of volume losses and pricing pressure.
“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%,” Jefferies said in a note, calling the development “a clear negative.”
The brokerage warned that ITC may need to raise prices by at least 15%—if not higher—to pass on the overall impact to consumers, potentially driving volumes to the illicit cigarette trade.
Nuvama analysts, which has downgraded the stock to hold, said the magnitude of tax hike seems higher than anticipated, likely prompting consensus downgrades to ITC’s cigarette volume and EBITDA estimates as well as multiples. Historically, after such a sharp hike, volumes decrease 3–9%. For example, FY11 logged a 3% volume decrease YoY after an ~18% price hike versus a strong FY10 (7% volume growth).
“A double-digit tax hike could push consumers towards smuggled cigarettes. As the effective date is Feb 1, we estimate January sales and production to sharply expand and therefore report a lower impact in Q4FY26. During FY13–17, the duty on cigarettes increased at a CAGR of 15.7%; however, tax revenue from cigarettes rose at a mere 4.7% CAGR. Thereafter, with relative stability in taxation until Jan-20, revenue collections grew ~10% (Apr’18–Jan’20 over Jul’17–Mar’18),” Nuvama’s Abneesh Roy said.
ICICI Securities analysts calculated the duty translates into a 22%-28% increase in overall costs for 75-85 mm cigarettes. “Cigarettes longer than 75 mm account for roughly 16% of ITC’s volumes and are likely to see price increases of 2–3 rupees per stick as a result of the levy,” they said.
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The tax shock comes as the government’s compensation cess period nears its end. Jefferies noted that the revised GST rate on tobacco was recently raised to 40%, which will amplify the impact as ITC implements price hikes.
For investors now nursing heavy losses, the key question is whether to buy into the fear or wait for more clarity. “While we are still unsure on the final outcome, if confirmed, this will be a clear negative as volumes will be impacted and concerns would also re-emerge on risk of losing some volumes to the illicit industry,” Jefferies cautioned.
ITC, which controls the cigarette market with brands including Gold Flake, Wills Navy Cut and Classic, now faces the unenviable task of balancing price increases with volume retention in a market already battling illicit trade.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)