Shares of cigarette companies such as ITC, Godfrey Phillips and VST Industries traded mixed ahead of the Union Budget. There are fears that FM Nirmala Sitharaman could announce a hike in excise duty or NCCD duty on cigarettes and tobacco products, which would be negative for cigarette makers. The last tax hike was announced three years ago. The budget for FY 21 increased the National Calamity Contingent Duty NCCD by 2 -- 4 times across cigarette stick sizes, resulting in tax hikes of 9 -- 15 per cent.
Prabhudas Lilladher believes that there will be a 5 -- 10 per cent increase in cigarette excise duty. Sharekhan said 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. A tax rate of 0 -- 10 per cent would have a marginal impact. The Street will be positively surprised if there is no increase in the tax rate on cigarettes, Sharekhan said.
Nuvama Institutional Equities believes there will be a hike in taxes on cigarettes as the last hike was made three years ago. The industry has seen a laudable recovery in legal cigarette volumes this year, and most other parts of consumption have seen a lot of inflation over the past three years, it said. It believes consumers will accept moderate hike in cigarettes tax below 12 per cent. Shares of ITC were trading 0.61 per cent lower at Rs 350.10. Godfrey Phillips' shares fell 1.15 per cent to Rs 1,901. VST Industries fell 0.6 per cent to Rs 3040.65.
Any tax hike over 12 per cent may have an adverse market dynamic impact, allowing space for illegal cigarettes to occupy market share. In a recent note, Nuvama stated that the likely tax hike keeps us cautious for the near-term.
Jefferies stated in a recent note that the Union Budget creates some uncertainty about a possible change in tobacco taxation. Its base case is built in a 5 per cent YoY tax hike in the Budget.
Revenue collections increased 10.2 per cent at a CAGR of 15.7 per cent during FY 13 to FY 17; tax revenues from cigarettes grew a mere 4.7 per cent CAGR.