The government has hiked the National Calamity Contingent Duty (NCCD) on cigarettes by 16%. NCCD accounts for about 10% of overall taxes on cigarettes.
While taxation of tobacco is primarily under the purview of the GST Council, the central government also levies NCCD on cigarettes, which is subject to changes in the Budget.
The government had left this duty untouched for 2 years. In the Budget for FY21, the NCCD was raised by 2-4 times across cigarette stick sizes, resulting in tax hikes of 9-15%.
For ITC, cigarettes constitute more than 80% of the company’s net profit and about 45% of its topline. Therefore, tinkering in taxes has an impact on the company’s financials.
According to Jefferies, the effective hike in tax on cigarettes would be 3.5%, resulting in a 1.5-2% increase in prices, at best.
“This is a clear positive for ITC. This improves volume growth visibility as well for ITC in the context of the modest product price hike required, the brokerage said.Jefferies also has a buy rating on ITC with a target price of 415, which signals an upside potential of 9% from the current market price of Rs 382 per share.
ICICIdirect too believes that the net tax on cigarettes would increase by 0.07-0.12% a stick, which would require a 1-3% hike in the prices of cigarettes across different categories.
“The hike in taxes is not very high and would be easily passed on by small increases (1-3%) in prices,” the brokerage said.
Meanwhile, brokerage firm
said, “Given the general inflationary environment and no-price hikes since the last two years, we believe ITC is likely to offset the impact of tax hike through selective price hikes. We expect ITC to continue delivering volume-driven outperformance in the cigarette’s business.”
On a year-to-date basis, ITC has surged over 14%, while it has risen over 64% in the last one year.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)