ITC shares plunge to 3-year low after tax bombshell: Is this a falling knife or hidden value?
ITC shares slid to a three-year low after a sharp two-day, 14% fall triggered by a steep cigarette tax hike, prompting multiple brokerage downgrades amid concerns that large price increases will be needed to offset the impact, risking volumes and earnings.
Synopsis
ITC shares slid to a three-year low after a sharp two-day, 14% fall triggered by a steep cigarette tax hike, prompting multiple brokerage downgrades amid concerns that large price increases will be needed to offset the impact, risking volumes and earnings.
ETMarkets.com
ITC shares slid to a three-year low after a sharp two-day, 14% fall triggered by a steep cigarette tax hike.
ITC shares crashed to a three-year low of Rs 345.35 on Friday, extending a brutal two-day selloff that has seen the Nifty bluechip stock plummet 14% after the finance ministry delivered a tax bombshell on cigarettes. The stock fell another 5% on Friday after losing 10% on New Year's Day, triggering a flurry of downgrades from at least six brokerages scrambling to reassess the damage.
The magnitude of the tax increase is staggering. Effective February 1, cigarette taxes will jump approximately 50%, forcing ITC to implement price hikes of at least 25% at the portfolio level just to maintain current net realization per stick, according to Motilal Oswal. The brokerage downgraded ITC from Buy to Neutral with a revised target price of Rs 400.
"To offset the tax burden, ITC will need to implement substantial price increases. Assuming no mix change, ITC requires a 40% price hike just to pass on the impact," Jefferies warned in its downgrade from Buy to Hold. The firm noted that if ITC passes on the full impact through price hikes, the effective tax hike comes to approximately 70%, pushing tobacco taxes per stick from 55% to 65% of MRP.
The tax shock comes with little precedent. "Such a sharp tax increase is unprecedented and has surprised us given the backdrop of stable taxes over the last few years," Motilal Oswal analysts wrote. The brokerage slashed its cigarette business valuation to 14x December 2027 EV/EBITDA from 17x previously—a multiple last seen during earlier high-tax cycles.
History suggests painful consequences ahead. Jefferies pointed out that during FY15-16, when ITC took mid-teen price hikes amid aggressive tax increases, cumulative volumes fell by more than 15%. The concern is amplified by the ad valorem component, where higher prices feed back into tax calculations, creating a vicious cycle.
The tax stability of recent years had been a tailwind for ITC, allowing its cigarette volumes to grow at approximately 5% CAGR over the last five years while the illicit cigarette market's volume share contracted by around 150 basis points, according to Motilal Oswal. That virtuous cycle now faces reversal.