What Cigarette Tax Hike Means for 37 Lakh ITC Shareholders
ITC’s Near-Term Outlook Post Excise Duty Hike
Jefferies has outlined that the recent significant increase in cigarette excise duty poses a clear negative impact on ITC in the short term. This notice from the finance ministry signals substantial challenges ahead for the company, particularly affecting its volume and earnings, despite Jefferies maintaining a positive outlook on the stock.
– The new excise duty rates for cigarettes range from ₹2,050 to ₹8,500 per 1,000 sticks, varying by length, effective February 1.
– Following this announcement, ITC’s stock price plummeted by 9.2%, reaching its lowest level since April 2023.
– Godfrey Phillips India, a notable competitor, saw its shares drop significantly by 14.1%.
The Implications of Increased Cigarette Taxes
Jefferies describes this tax increase as a meaningful negative surprise for the legal cigarette industry, estimating that the effective tax burden on cigarettes rises to well over 20%. This steep hike follows a period of tax stability, injecting additional uncertainty into the fiscal landscape for legal cigarette manufacturers such as ITC.
– Analysts at ICICI Securities note that this excise duty translates to a 22%-28% rise in overall costs for 75-85 mm cigarettes.
– Cigarettes longer than 75 mm represent approximately 16% of ITC’s volumes, with prices expected to increase by ₹2-₹3 per stick.
To protect its profit margins, ITC may need to implement double-digit price increases across its leading cigarette brands. However, such steep price adjustments pose risks:
– A potential drop in legal industry volumes could lead to increased down-trading and a rise in illicit trade, negatively impacting ITC’s market share.
– Historically, higher taxation on legal cigarettes has incentivized illicit trading, a trend that had been moderating with previous tax hikes.
Future Considerations for ITC Shareholders
Despite labeling the tax hike as clearly negative and forecasting downside risks to near-term earnings and volume growth, Jefferies has retained a Buy rating on ITC.
– The brokerage set a target price of ₹535, ascribing a valuation to ITC’s cigarette operations of 23 times the projected December 2027 earnings using a sum-of-the-parts framework.
– Jefferies remains optimistic about a 15% total shareholder return over the next year.
Conclusion
The recent cigarette tax hike poses significant challenges for ITC’s 37 lakh shareholders. While the immediate impact may be substantially negative, the company’s long-term outlook remains supported by strategic financial positioning. Investors should remain vigilant about the implications of this tax increase, as it could reshape market dynamics in the cigarette industry, potentially impacting both volumes and profitability for ITC moving forward.