NEW DELHI: Yet another increase in levies on cigarettes and other tobacco products proposed in the Budget this year have sent stocks of cigarette majors like ITC, Godfrey Phillips and VST Industries diving.
In fact, the latest proposed increase in excise duties saw ITC Ltd booted out of India’s ten most valued companies list, the scrip losing as much as 12.7 per cent on the bourses since the finance minister presented the Budget.
On Monday, ITC shares fell 5.09 per cent to close at Rs 207.70 on the BSE, while VST Industries and Godfrey Phillips India fell 1.48 per cent and 0.86 per cent respectively.
Finance Minister Nirmala Sitharaman had proposed to increase excise duty through a National Calamity Contingent Duty on cigarettes and other tobacco products.
For ITC, increased cigarette duties come as a double whammy since its other core business vertical — fast-moving consumer goods — is currently in the doldrums.
Analysts note that the increased cigarette tax (up to 16 per cent in some slabs), can prompt ITC to implement a 10-15 per cent price hike.
This, in turn, would lead to declining volumes in a very weak macro environment.
“Even after taking price hikes of over 10 per cent, cigarette earnings before interest and tax (EBIT) is likely to be flat in the best case in FY21. Additionally, risk of GST cess hike does not go away,” Credit Suisse said in a note.
Analysts also say the increased prices may lead to customers shifting to cheaper, even unregulated, alternatives.
The company’s financials for the third quarter indicate that this is already turning out to the a problem for the company, with sales from cigarettes growing just 4.7 per cent year-on-year.
“Management commentaries suggest that apart from a weak demand environment, the increasing salience of illicit trade, especially at the premium end, also had an adverse impact on the quarter’s performance,” said analysts from JM Financial.