Shares of listed cigarette companies plunged on Tuesday after the GST Council raised the compensation cess on cigarettes with immediate effect. The consumer goods major ITC was worst hit, its stock crashing 15 per cent, while smaller rival VST Industries tumbled more than 7 per cent and Godfrey Phillips India was also down around 6 per cent.
The decline in ITC's shares, the worst in over two decades, wiped off more than Rs 50,000 crore in the company's market cap. It also dragged the wider markets lower, with the BSE's benchmark Sensex slipping over 400 points at one point.
In late-afternoon trading, ITC was trading 12.4 per cent lower at Rs 285.50, VST Industries was down 7.2 per cent at 3,303, and Godfrey Phillips was 5.6 per cent lower at Rs 1,159.
The BSE Sensex was down to almost 0.7 per cent or 215 points at 31,860.27 in late afternoon trading. The NSE Nifty 50 index was also down 0.5 per cent or 48 points at 9,867.60.
The GST Council had in May fixed a tax rate of 28 per cent on cigarettes. On top of that, a 5 per cent ad valorem cess was levied and there was a further fixed cess per thousand sticks, which varied according to the length of the cigarettes.
The overall GST rate on cigarettes was lower than the pre-GST taxes on cigarettes and would have led to Rs 5,000 crore windfall gains to companies.
Now to reverse this “anomaly,” while the GST rate and the ad valorem cess remain unchanged at 28 per cent and 5 per cent respectively, the fixed cess has been hiked in the range of Rs 485 and Rs 792 per thousand sticks.
Foreign brokerage CLSA cut its rating on ITC to “sell” and estimates the taxes will go up by 10 per cent from pre-GST levels and ITC would need to raise prices by 5 per cent just to maintain net realisations.
Another brokerage, JM Financial, also says the higher cess would be passed on to cigarette consumers, but price hikes would be steeper.
“The GST Council went ahead and tinkered the structure in a manner that leads to an 8-16 per cent hike in total indirect taxes on cigarettes. Ceteris Paribus [other things constant], we estimate a hit of Rs 35-36 billion (Rs 3,500-3,600 crore) to ITC's profits on an annualised basis—akin to the worst case scenario feared by us prior to the government firming up on a much more rational tax structure announced on May 18,” said Richard Liu of JM Financial.
Liu estimates ITC would have to raise prices by 8-9 per cent to pass on the absolute increase in taxes. For the high-end Kings segment, the price hike necessitated would be a sharper 16 per cent, if the company was to earn the same net realisation that it clocked earlier.
However, analysts say price hikes could also hurt companies' volume growth (number of cigarettes sold).
“This (increased cess) will impact the earnings of cigarette companies as they will either absorb the tax impact or see some drop in volumes if they hike the prices,” said analysts at Angel Broking.
