Last week, ITC
increased cigarette prices by 10-20 per cent across some of its brands in all of its markets.
According to analysts, the tax increase in the Union Budget comes as a negative surprise and is likely to affect earnings growth in the near term. The deceleration in cigarette earnings before interest and tax (EBIT) growth along with the tax hike and continuing demand slowdown reduce the near-term growth visibility.
“Although the price increases do not seem to be substantial, given reduced affordability and demand slowdown it could impact cigarette volume and profitability. In addition, the impact could be higher for key brands moving out of the popular price points”, analysts at Emkay Global Financial Services said in a company update.
Analysts at JP Morgan downgrade ITC to ‘Neutral’ from ‘Over Weight’ post the increased tax incidence on cigarettes announced in the budget. While the brokerage firm expects ITC to largely pass on the tax impact (and maybe even more), it would impact volume growth and weigh on stock multiples, restricting stock upside from current levels over the next 6-12 months.
In recent quarters, growth for the other two key cigarette manufacturers (VST Industries and Godfrey Philips) has been ahead of ITC’s cigarette division raising concerns on some market share loss for the incumbent. The uncertainties for volume growth over the next 3-6 months, expectations of lower earnings per share (EPS) growth and risk of excise duty changes (besides GST cess) in future would keep multiples in check, the brokerage firm said in a note with December 2020 price target of Rs 235 per share.