ITC scrip falls to highest single day fall in 6 years on talk of hefty cigarette tax

Cigarette prices could go up by anywhere between Rs 2 - 3.5 per piece

Worries over a higher tax burden on cigarette prices hit the shares of ITC, the tobacco giant, dragging these down seven per cent on Monday, the highest single-day fall in six and a half years.

The stock traded weakly through the day after media reports quoted Union Health Minister Harsh Vardhan that the government was mulling an aggressive increase in excise duty on cigarettes. This might send the price of a cigarette up by Rs 2–3.5 apiece. ITC is the country’s largest producer of cigarettes and its shares reacted negatively, closing at Rs 314.5, down 6.5 per cent or Rs 21.85 a share from its previous close.

 

The BSE fast moving consumer goods index was down four per cent on Monday, led by declines in ITC, largest stock in weightage. ITC, also the second largest stock in the benchmark BSE Sensex, also weighed on the broader market.“The stock has been under pressure because of the low volume growth the company has been witnessing for the past few quarters. With this talk about increasing the excise duty further, the volumes and earnings growth could be further under pressure,” said Sunil Jain, vice-president, equity research, Nirmal Bang Securities.

In the past year, the stock price of ITC has remained flat, against a 35 per cent gain in the benchmark Sensex. “The company has been able to absorb whatever price hikes that we have seen so far. But this one could be much larger and might not be passed on to the customers at one go,” said Rikesh Parikh, vice-president (equities), Motilal Oswal Securities. The previous government had raised excise duty by about 19 per cent in the 2013 Budget.

Beside ITC, other cigarette manufacturers also closed in the red on Monday. Godfrey Phillips was down 1.5 per cent and closed at Rs 2,858 a share. Shares of Hyderabad-based VST Industries were down 4.6 per cent, to end at Rs 1,808 a share.

Analysts said the share price fall in ITC could be capped at seven per cent from current levels, as the stock had already been under pressure due to declining volumes and weak growth in the rural economy. At a price to earnings multiple of 21 times for FY16 earnings, analysts said the stock was much cheaper than most of the other FMCG companies.

Further, the impact of the proposed hike in excise duty may be spread out over a few quarters as the company may not pass it onto the customers all at the same time.

 

"The company has been able to absorb whatever price hikes that we have seen so far. But this one could be much larger and may not be passed on to the customers at one go," said Rikesh Parikh, vice president (equities), Motilal Oswal Securities.

The previous government had raised excise duty by about 19% during the budget announcement of 2013. Besides ITC, other cigarette manufacturers also closed in the red on Monday. Godfrey Phillips was down 1.5% and closed at Rs 2,858 per share. Shares of Hyderabad-based VST Industries were down 4.6% to end at Rs 1,808 per share.