Shares of ITC Ltd., the cigarettes-to-hotels conglomerate, opened 2.5% lower on Tuesday, reflecting investor concerns over proposed tax changes on tobacco products. The Group of Ministers (GoM) is reportedly considering a “special rate” of 35% on tobacco and aerated beverages. The potential tax adjustments could have varying impacts on ITC, depending on their implementation.
Investors Brace for Impact: Three Scenarios to Watch
The market is grappling with three key scenarios regarding the proposed tax rate, each with a distinct impact on ITC’s tax incidence and profitability.
- Scenario 1: Tax Increase Beyond Existing Cess
If the 35% special rate is imposed on top of the current compensation cess, ITC could face a tax incidence increase of 5% to 12%. Analysts believe this would necessitate a single-digit price hike on cigarettes to offset higher costs. - Scenario 2: Replacement of Ad-Valorem Cess
Should the special rate replace only the ad-valorem portion of the compensation cess, the overall tax burden for ITC would remain largely neutral. This scenario may be the least disruptive to ITC’s pricing strategy. - Scenario 3: Replacement of Entire Cess
If the 35% special rate replaces the entire compensation cess, it could result in a reduction of tax incidence by nearly 20%. Such a development would provide significant relief to ITC and might even enhance margins.
Macquarie, in a recent note, highlighted that cigarettes currently attract a 28% GST rate along with a compensation cess ranging from 5% to 36%, depending on the cigarette’s length. The brokerage emphasized that any additional levy would compel ITC to adjust prices to sustain margins.
Market Sentiment and Analyst Ratings
Despite the stock’s recent struggles—down 11% from its ₹528 peak—analyst sentiment remains predominantly positive. Of the 38 analysts tracking ITC:
- 33 recommend a “Buy” rating
- Three advise “Hold”
- Two suggest “Sell”
The optimism stems from ITC’s diversified portfolio, including its FMCG, hotels, and agriculture businesses, which provide a cushion against regulatory risks in its cigarette segment.
Broader Market Context and ITC’s Response
Tuesday’s broader market sentiment remained upbeat, with indices like the Nifty 50 and Sensex posting gains. However, ITC’s decline stood out, reflecting focused concerns on the potential tax changes.
According to sources, ITC may adopt strategic price hikes or cost management measures depending on the final tax framework. However, until greater clarity emerges, investors are likely to tread cautiously.
