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Budget 2023: Will ITC shares take a hard hit from any upward revision in cigarette tax?

Budget 2023: Will ITC shares take a hard hit from any upward revision in cigarette tax?

ITC’s average target price based on 34 commendations stood at Rs 373.92, as per data available with Trendlyne, which suggests a potential 12 per cent upside for the stocks

ITC may report 9 per cent YoY growth in cigarette volumes against 5.1 per cent in the last quarter, largely driving 12.3 per cent YoY growth in cigarette sales, Kotak Institutional Equities said in a note. ITC may report 9 per cent YoY growth in cigarette volumes against 5.1 per cent in the last quarter, largely driving 12.3 per cent YoY growth in cigarette sales, Kotak Institutional Equities said in a note.

A couple of brokerages see probability of a hike in cigarette tax this coming Budget. The last tax hike was announced three years ago. Nuvama Institutional Equities said that there has been a laudable recovery in legal cigarette volumes this year, but noted that most other parts of consumption have seen sharp inflation in the past three years. It believes consumers are likely to accept moderate hike in cigarettes tax (below 12 per cent).

For now, the average target price for ITC based on 34 commendations stood at Rs 373.92, as per data available with Trendlyne, which suggests a potential 12 per cent upside for the stocks. Analysts, for now, are maintaining their price targets.

"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, we retain ‘BUY’ with an unchanged TP of Rs 400," Nuvama said.

Jefferies said it expects momentum in the cigarette business to continue, with ITC delivering 15 per cent cigarette Ebit growth in FY23 and 10 per cent in FY24.

"Union budget in February however does create some near-term uncertainty on a potential change in tobacco taxation - our base case builds in a 5 per cent YoY tax hike in the Upcoming Budget," Jefferies said.

Prabhudas Lilladher is expecting a 5-10 per cent hike in cigarette excise duty.

Nuvama noted that during FY13 to FY17, duty on cigarettes was increased sharply at a CAGR of 15.7 per cent, but tax revenues from cigarettes grew a mere 4.7 per cent CAGR.

Thereafter, relative stability in taxation was observed until January 2020, with revenue collections growing 10.2 per cent.

Published on: Jan 11, 2023, 8:47 AM IST
Posted by: Priya Raghuvanshi, Jan 11, 2023, 8:43 AM IST