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Tobacco Tax U-Turn Burns $7 Billion Hole In ITC's Market Cap

By Steve Wynne-Jones
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Tobacco Tax U-Turn Burns $7 Billion Hole In ITC's Market Cap

ITC Ltd., Asia’s second-largest cigarette maker by value, plunged the most in 25 years after India surprised investors by raising levies on tobacco products.

The stock slumped 12 percent to 285.1 rupees at 3:12 p.m. in Mumbai, erasing $7.5 billion from the company’s market value. Godfrey Phillips India Ltd., which counts Philip Morris International Inc. as an investor, tumbled 3.7 percent. The government on Monday increased the cess on cigarettes by as much as 10 percent.

The higher levies prompted CLSA Ltd. to ask its clients to sell ITC, while Credit Suisse Group AG, which said the duties were a “u-turn” from the government’s previous stance, cut its stock recommendation to neutral. Taxes on tobacco products were raised as the switch to a nationwide tax on July 1 was handing a windfall to cigarette makers, Finance Minister Arun Jaitley said Monday.

“The arbitrary nature of changing tax rates sends a negative signal that India continues to be infamous for its unstable tax policies,” said Chakri Lokapriya, Mumbai-based managing director of TCG Advisory Services Ltd., which manages about $3 billion of global assets. “The lack of regard for a company’s business planning provides a window into the government’s thinking.”

Tobacco Levies

Levies on tobacco products comes a fortnight after the nation rolled out the new goods and services tax, which unifies 29 states into a single market for the first time. The GST regime, aimed at widening the tax net, is India’s most sweeping tax overhaul since independence.


The duty on large cigarettes has been increased to 36 percent with producers being asked to pay an additional levy of 4,170 rupees per thousand sticks, according to a statement from the finance ministry. The previous rate was 31 percent. Higher taxes will prompt ITC and Godfrey Phillips to raise prices by as much as 9 percent, according to the brokerages.

‘Negative Outcome’

CLSA is “forced to downgrade to sell as earnings outlook weakens,” the brokerage said in a note on Tuesday. “Higher price hike would be required to grow earnings, which may impact volumes. The outcome is negative from the neutral stance that the government mentioned.”

The stock, which has the fourth-highest weighting in India’s S&P BSE Sensex, had rallied 5.8 percent on July 3 as the GST had reduced cigarette taxes by about 9 percent.

"While any reduction in tax incidence on items of mass consumption would be welcome, the same would be unacceptable in case of demerit goods like cigarettes," the finance ministry said in a statement on Monday.


ITC did not immediately comment on the development.

Over the past decade, the company has expanded into consumer products such as soaps and snacks to reduce its dependence on tobacco. Cigarettes still bring in 60 percent of revenue, and higher taxes may dent consumer sentiment that remains subdued after November’s currency clampdown, brokerages said.

The cigarette industry witnessed an “unprecedented” double-digit tax increase from 2013 through 2017, which led to a decline in volumes for ITC and tax collections, Deutsche Bank AG said in a note on Tuesday. “It appears that moralistic views on reducing cigarette consumption appear to be prioritized over economic value of optimizing tax collection."

News by Bloomberg, edited by ESM. Click subscribe to sign up to ESM: The European Supermarket Magazine.

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