Why ITC still has a lot of fire left in it

The stock price of ITC is down 40% due to recent tax hikes and the market meltdown. But besides a habit that is hard to kick, ITC has other arrows in its quiver


American humourist Will Rogers once famously said, “The difference between death and taxes is death doesn’t get worse every time Congress meets.” That one-liner aptly reflects the sentiment of Indian cigarette manufacturers. Every time the finance ministry gets ready to announce the Union Budget, investors in these cigarette-makers girdle up for tax hikes that hurt their stocks. ITC has been a victim of this routine, with its stock giving a return of -4% CAGR over the past five years.

The last Union Budget was no different. Finance minister Nirmala Sitharaman raised the “sin” tax and announced an increase in the National Calamity Contingent Duty (NCCD) component between 212% and 388% for cigarette sticks of various sizes. It came as a huge blow to the company since the cigarette business makes up for 41% and 83% of the overall revenue and Ebit, respectively. Meanwhile, FMCG, hotel, agriculture and paper businesses account for 59% and 17% of the topline and Ebit, respectively. The stock tanked 12% on Budget day.

“The government didn’t have any other avenue to increase taxes, and GDP growth is extremely low. This is one tax that is easy to implement since it comes under the ‘sin’ category, and there won’t be any hue and cry,” says Abneesh Roy, senior vice president-research, Edelweiss Securities. For ITC, the Budget announcement would translate into a tax hike of around 9-15%, and the company will have to increase prices by 6-7%. “Whenever there is a tax hike, the company is forced to hike prices, and affordability becomes a concern for customers. Cigarette companies everywhere face this problem,” says Roy.

This also results in migration of buyers towards illegal cigarette makers. According to The Tobacco Institute of India, illegal cigarette trade — smuggled internationally and locally manufactured — accounts for as much as one-fourth of the industry in India. This method of tax evasion rises when the government increases tax and imposes extreme regulations on the cigarette industry, notes the institute. Roy expects cigarette volume growth of organised players to decline by 3% in FY21, as illegal players gain market share. “The market share of illegal firms


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