ITC Falls Over 6% Amid Tobacco Tax Worries

Shares of ITC Ltd. fell following reports that the government’s forming a panel to develop a comprehensive tax policy for all tobacco products.

The shares of India’s largest cigarette maker fell 6.3% to Rs 245.9 apiece on Tuesday. The stock hit an intraday low of Rs 245.3, and was the worst performer on the NSE Nifty 50, which dropped 0.32%.

According to Jefferies, the panel will analyse existing tax structure for all forms of tobacco, including smoking and smokeless. “It’s difficult to predict what the expert group would recommend and what government will implement at this stage,” the research house said. “However, this has clearly raised concerns on tobacco taxation in the run-up to the budget on Feb. 1, 2022.”

“As a result, ITC stock could remain rangebound and even go down closer to the budget,” the research house said.

• The outcome needn’t be negative as tobacco taxation is already high in India.

• The group may even prescribe harsher measures on non-cigarettes, which is nearly 90% of overall tobacco consumption in India but contribute a fraction to overall taxes.

ITC is the market leader in the Indian cigarette industry with a 75% volume share. In addition to cigarettes, which generates 65% of its revenue, the company has a diversified presence across consumer staples, branded foods, paper, hotels and retailing businesses.

In the base case, Jefferies has forecast 12% annual growth in cigarette Ebit over FY21-24 on a low base and a 11% growth in FMCG revenue for ITC. “Cigarette margins are expected to expand by 140bps over FY21-24E as an increase in consumer prices should more than offset tax hikes,” it added.

Of the 39 analysts tracking ITC, 23 have a ‘Buy’ rating, five suggest ‘Hold’ and one recommends ‘Sell’, according to Bloomberg data.