Shares of India’s largest cigarette maker, CCIsuffered its biggest one-day fall in almost six years on Thursday, with stocks crashing 10 per cent and wiping out over Rs 50,000 crore of market capitalization after the Finance Ministry imposed a drastic new tax on cigarettes on Wednesday evening.
The stock fell to a fresh 52-week low of Rs 362.7 during the session as investors rushed to assess the damage caused by excise duty rates that could lead to price increases of at least 15%.
Godfrey Phillips Indiawhich sells Marlboro cigarettes in the country, fared even worse, plummeting by as much as 19%, its biggest drop since November 2016.
The carnage follows the Finance Ministry’s notification of excise duty ranging from Rs 2,050 to Rs 8,500 per 1,000 cigarette sticks, depending on the 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 price pressure.
“There are still many unknowns, but our calculations suggest that a tax increase could be more than 30% if the NCCD continues; in the event that the NCCD is integrated, the impact is still expected to be well above 20%,” Jefferies said in a note, calling the development “clearly negative.”
The brokerage firm warned that ITC may have to increase its prices by at least 15% or more to pass on the overall impact to consumers, which could lead to increased volumes to the market. illicit cigarette trade.
Analysts at Nuvama, who downgraded the stock to hold, said the scale of the tax hike appears higher than expected, which likely led to a downward revision in ITC’s cigarette volume and EBITDA estimates, as well as multiples.
Historically, after such a strong increase, volumes decrease by 3 to 9%. For example, FY 2011 saw a volume decline of 3% year-on-year after a price increase of around 18% compared to a strong FY 2010 (volume growth of 7%).
“A double-digit tax hike could push consumers toward contraband cigarettes. As the effective date is February 1, we estimate that sales and production in January will increase sharply and therefore report a smaller impact in Q4 FY26. During FY2013 to FY2017, duties on cigarettes increased at a CAGR of 15.7%; however, tax revenue from cigarettes did not increased by only 4.7% CAGR Subsequently, with relative stability in taxation till January 20, tax revenue increased by ~10% (from April 2018 to January 2020 compared to July 2017 and March 2018),” said Abneesh Roy of Nuvama.
Analysts at ICICI Securities have calculated that these duties would result in a 22-28% increase in the overall cost of 75-85mm cigarettes. “Cigarettes above 75 mm in length account for around 16 per cent of ITC volumes and are expected to see a price increase of Rs 2-3 per stick due to the tax,” they said.
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The fiscal shock comes as the period of suspension of government compensation is coming to an end. Jefferies noted that the revised GST rate on tobacco was recently increased to 40%, which will amplify the impact as the ITC implements price increases.
For investors currently suffering heavy losses, the key question is whether they should embrace fear or wait for more clarity. “While we are still unsure of the final outcome, if confirmed it will be clearly negative as volumes will be affected and concerns will also re-emerge over the risk of some volumes being lost to the illicit industry,” Jefferies warned.
ITC, which controls the cigarette market with brands such as Gold Flake, Wills Navy Cut and Classic, now faces the unenviable task of balancing price increases and volume retention in a market already struggling with illicit trade.
(Disclaimer: The recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of the Economic Times.)