ITC, other cigarette stocks choke up on panel talk

Abhishek Law Kolkata | Updated on October 19, 2021

Expert group to analyse tax structure on all tobacco products with focus on health

Shares of cigarettes-to-hotel conglomerate ITC Ltd fell over 6 per cent on Tuesday, at the NSE, after a Union Health Ministry document showed that the government has decided to constitute an expert group to develop a comprehensive tax policy for all tobacco products. The stock closed at ₹246.10 at the NSE.

For ITC – that sells everything from instant food, snacks and groceries across brands like Sunfeast, Aashirvaad, Savlon, among others – cigarettes continue to be a money-making business. ITC is the market leader in the cigarettes category with brands like Insignia, India Kings, Classic, Goldflake, to name a few, under its fold.

The Kolkata-based firm had reported a stand-alone net profit of ₹3,013 crore for the quarter ended June 2021. Revenue from operations increased 36 per cent y-o-y to ₹ 12,959 crore while EBITDA grew by over 50 per cent. ITC’s Q1-FY22 saw a cigarette volume growth of 32 per cent. Cigarette margins improved by 210 bps y-o-y due to higher operating leverage and revenues grew 33 per cent y-o-y.

According to analysts tracking the segment, cigarettes as a category has been staging a a recovery from last year’s nationwide lockdown. It is expected to witness a volume growth of 10-12 per cent on a softer base.

Abneesh Roy, EVP, Edelweiss Securities, said, the ITC stock has done reasonably well in the past few months (vs its 6 year track record) reflecting broader stock market rally, unlock trade for its hotel and cigarettes businesses and the potential value unlock in its different businesses. He anticipates “decent” Q2 results.

“We see high probability of tax hike in the upcoming Budget on February 1. The cigarette taxes did not see any increase in last year’s Budget. Prior to that cigarette taxes increased 11 per cent,” he told BusinessLine adding that “a high tax hike beyond 10 per cent will be negative for cigarettes as illegal cigarettes will take market share.”

Also, one needs to see how the tax rates on beedis would play out. Although more harmful, beedis carry a lower tax rate then cigarettes, say industry sources. “It is important to note that cigarette cess would cease to exist from mid next year, post the completion of its five-years tenure. If this policy takes away uncertainty related to cess and provides a proper roadmap, which is not very high increase in cigarette taxes and increases the tax on beedis, then it will be liked by investors. So the panel’s recommendations will finally play an important role on cigarette stocks,” said another industry tracker.

The expert group on tobacco taxation will reportedly have officials of Union Health Ministry, Finance Ministry, GST Council and NITI Aayog member and the World Health Organization’s India office, and a health economist.

The panel will analyse the existing tax structure for all forms of tobacco, develop a roadmap for tobacco tax policy, and recommend steps for making India compliant with WHO’s so-called ‘MPOWER’ package that aims to, among other things, raise taxes to lower demand for tobacco products. “ITC, Godfrey Phillips & VST Ind could see an overhang if recommendation is harsh,” Edelweiss’ Roy said.

Other tobacco stocks

Different tobacco stocks reacted differently to the news. The country’s second largest cigarette maker, Godfrey Phillips India – makers of Marlboro – saw a 1.42 per cent fall in its share price with the stock closing at ₹1,296.10 at the NSE. VST Industries saw a 2.95 per cent fall in stock prices to ₹3,692.05 NSE while Golden Tobacco saw its stock fall 2 per cent to ₹152 on Tuesday.

Published on October 19, 2021

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