Godfrey Phillips India, which sells Marlboro cigarettes in the country, fared even worse, falling as much as 19% in the steepest decline since November 2016.The massacre followed 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, with effect from February 1. The levy will come 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 uncertainties, but our calculation suggests that a tax increase could exceed 30% if NCCD goes ahead; in the event that NCCD is accommodated, the impact should still be well over 20%,” Jefferies said in a note, calling the development “a clear negative.”
The brokerage warned that ITC may have to increase prices by at least 15% – if not higher – to pass on the overall impact to consumers, potentially driving volumes into the illicit cigarette trade.
Nuvama analysts, who downgraded the stock to hold, say the size of the tax hike appears higher than expected, likely leading to consensus cuts to ITC’s cigarette volume and EBITDA estimates, as well as multiples. Historically, after such a sharp increase, volumes decline by 3 to 9%. For example, FY11 recorded a 3% year-on-year volume decline following a ~18% price increase, compared to a strong FY10 (7% volume growth).
“A double-digit tax increase could push consumers toward smuggled cigarettes. Since the effective date is February 1, we estimate that sales and production will rise sharply in January and therefore report a lower impact in Q4 26. During FY13-17, cigarette excise taxes increased at a CAGR of 15.7%; however, cigarette tax revenues increased at only 4.7% CAGR. Thereafter, with relative stability in taxation to Jan 20, cigarette tax revenues rose at just 4.7% CAGR grew around 10% (Apr 18 – Jan’20 vs. Jul ’17 – Mar ’18),” Nuvama’s Abneesh Roy said.
Analysts at ICICI Securities calculated that the excise duty translates into a 22% to 28% increase in the total cost of 75-85mm cigarettes. “Cigarettes longer than 75mm account for roughly 16% of ITC volumes and are likely to see price hikes of Rs 2-3 per stick due to the levy,” they said.
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The tax shock comes as the government’s compensation period comes to an end. Jefferies noted that the revised GST rate on tobacco has recently been increased to 40%, which will amplify the impact as ITC implements price hikes.
For investors now suffering heavy losses, the most important question is whether to believe in the fear or wait for more clarity. “While we are still uncertain about the final outcome, if confirmed, this will be clearly negative as volumes will be affected and would raise renewed concerns about 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 with volume maintenance in a market already battling illicit trade.
(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of the Economic Times)
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