GST move has tobacco shares huffing & puffing

Palak Shah Mumbai | Updated on January 11, 2018


ITC sees biggest one-day fall in 25 years; market cap dips over ₹50,000 crore

Even as India’s home-grown tobacco major ITC witnessed its biggest crash in 25 years on Tuesday, top market experts are least worried. The share price of the company fell 12 per cent to close at ₹284 after GST on cigarettes were raised on Monday post-market closing.

Other tobacco major shares too fell sharply on the day. VST Industries tumbled 7.8 per cent at ₹3,281.80, Godfrey Phillips India tanked 5.7 per cent at ₹1,157.60 and Golden Tobacco edged down 3.6 per cent at ₹57 on the BSE.

“ITC has a monopoly in its segment, which will take care of the rest,” said Raamdeo Agarwal, MD and co-Founder, Motilal Oswal Financial Services. “It has been a best performing stock for 25 years and will continue to be. ITC can easily raise prices for its products, which it will.”

Tax on cigarettes was raised by ₹792 for every 1,000 units and the new rates would be effective Tuesday. The taxes went up after a government panel moved to correct an anomaly in the GST that could have given windfall gains of over ₹5,000 crore annually to cigarette makers. ITC’s market-cap eroded by over ₹50,000 crore to ₹3,46,000 crore on Tuesday.

‘Deserved punishment’

“The stock has got whatever punishment it deserved,” said Mehraboon Irani, independent equity advisor.

“The ITC stock has performed better whenever there have been rise in tax rates on tobacco. Price rise taken by cigarette companies are often more than the rise in tax rates due to rounding-off effect.”

Irani is of the view that though there may not be a major upside in ITC, there may not be a major fall either.

“Growth in sales volumes could be a drag on the counter for a few quarters. The upside could be limited as it may not get re-rated by institutions in a hurry due to lacklustre sales growth.”

Killing gains in ‘puts’

Was the news of government action leaked? Markets are agog with rumours that a few traders could have got the news of the government action on tobacco companies in advance. Just 10 minutes ahead of the market closing session on Monday, nearly seven lakh ITC ‘Put’ options of ₹280 strike price were picked by those anticipating a major fall in the stock. These ‘Puts’ which were last traded at around ₹0.75 touched a high of ₹20 on Tuesday as ITC crashed by 15 per cent during intraday trade and touched a low of ₹276.

The traders who bought the ‘Puts’ on Monday made a killing.

Published on July 18, 2017

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