Business
Rs 50,000 crore wiped out as ITC shares crack 10%, worst day in 6 years. Should investors buy the fear?
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.
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.Also Read | ITC, Godfrey Phillips shares crack up to 8% on New Year’s Day. What’s the bad news?
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)
