ITC shares plunge 6%; Godfrey Phillips, VST tumble up to 8% as FM hikes calamity duty

Shares of cigarette companies such as ITC, Godfrey Phillips and VST Industries took a beating, falling up to 8 per cent in Wednesday's trade after the Finance Minister Nirmala Sitharaman hiked calamity duty on cigarettes and tobacco products by 16 per cent.

Shares of ITC plunged 6.02 per cent to hit a low of Rs 331.05. Godfrey Phillips hit a low of Rs 1,772, down 8 per cent. VST Industries was trading 0.38 per cent lower at Rs 3,011. The market was largely fearing either a hike in excise duty or NCCD duty on cigarettes and tobacco products, as the last tax hike was announced three years ago. The Budget for FY21 had increased the National Calamity Contingent Duty (NCCD) by 2-4 times across cigarette stick sizes, resulting in tax hikes of 9-15 per cent.

"Net tax on cigarette would would require 1-3 per cent price hike for cigarette in difference category. The hike in taxes is not very high and would be easily passed on by small increase (1-3 per cent) in prices, said ICICI Securities.

Sharekhan had said that an increase in rate by 0-10 per cent duty should be neutral for cigarette stocks, but any increase in rate by 10-15 per cent will be negative.

"If the tax rate on cigarettes is increased by 10-15 per cent, it would affect sales volumes of ITC’s cigarette business in subsequent quarters, as the company will pass on the increase in tax rate to consumers through price hikes. Increase in  tax rate of 0-10 per cent would have a marginal impact," Sharekhan had said.

"Any tax hike beyond 12 per cent may have an adverse market dynamic impact allowing space for illegal cigarettes to occupy market share. Although the probable tax hike keeps us cautious for the near-term," Nuvama said in a recent note.

Nuvama Institutional Equities said it expects decent probability of some  hike in taxes on cigarettes as the last hike  was made three years ago. It said the industry has seen laudable recovery in legal cigarette volumes this year and most other parts of consumption has seen sharp inflation in the past three year. It believes consumers are likely to accept moderate hike in cigarettes tax (below 12 per cent).

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