GST: Cigarette makers choke, ITC worst hit

Cigarette makers on Tuesday were choking in trade, with market leader ITC being hit the worst, its stock falling as much as 15 per cent to Rs 276.90 on the BSE, which reduced its market value to Rs. 3.37 lakh crore, compared to Monday's closing value of Rs. 3.96 lakh crore. The slump comes on the back of the GST (Goods and Services Tax) Council led by Finance Minister Arun Jaitley on Monday evening hiking compensation cess on cigarettes.The hike came into effect from the midnight of Monday and Tuesday.
The Sensex tanked as much as 450 points while the Nifty briefly slipped below the 9,800 mark to 9,792.05. Losses in the market were led by ITC, which has the second highest weightage (7.65 per cent) in the broader Nifty.
Salt-to-hotels conglomerate ITC’s cigarette division contributes nearly two-thirds of the FMCG (fast moving consumer goods sector) major's total revenues. Over 60 per cent of ITC's revenues come from its cigarettes business.
Brokerage firm Macquarie said the increase in cess is clearly a negative for ITC. The increase in overall taxes/ higher retail prices would impact cigarette volume and earnings adversely, it said.
Hong Kong-based investment firm CLSA said, “For now, we estimate 10 per cent hike in taxes from pre-GST levels and ITC would need to raise prices by 5 per cent just to maintain net realisations. Higher price hike would be required to grow earnings which may also impact volumes."
JM Financial in a note to investors said, “In reality, this hit would be passed on to consumers through price-hikes. We estimate the need to do so by 15-16 per cent in the Kings segment and 8-10 per cent in the rest of the portfolio.”
The GST Council on Monday hiked the cess on cigarettes to take away the "windfall" manufacturers were reaping due to an anomaly that crept in after the GST rate fixation, Jaitley said.
The compensation cess on cigarettes consists of two components -- an ad valorem tax of 5 per cent and another numerical cess on each category of filter and non-filter varieties.
While the ad valorem has remained the same, the numerical cess linked to the length of cigarettes was increased by the Council.
For non-filter 65 mm cigarettes, the numerical cess has been raised to Rs. 2,076 per 1,000 units; for non-filter 65-70 mm cigarettes it is Rs. 3,668 per 1,000 units.
For filter category, 65 mm cigarettes will be charged Rs. 2,076 per 1,000 units, 65-70 mm will be charged Rs. 2,747 per 1,000 units and 70-75 mm will be charged Rs. 3,668 per 1,000 units.
For other filter cigarettes the ad valorem has been increased to 36 per cent plus Rs. 4,170 per 1,000 units.
Whether cigarette makers will increase prices is currently unclear. However, brokerages believe the companies would have to hike prices in order to protect margins.
The increase in cess would bring in Rs 5,000 crore of additional tax revenue which otherwise would have gone to the manufacturers, Jaitley said after the emergency meeting that took place on Monday evening through video conferencing.
On Tuesday, other cigarette makers such as Godfrey Philips and VST Industries also fell sharply in trade. While Godfrey Philips fell 10.35 per cent to 1,100.05, VST Industries slumped 8.31 per cent to Rs 3,276.
At the close of Tuesday’s trading, ITC was down 12.63 per cent at Rs. 284.60 compared to 0.89 per cent decline in the broader Nifty. Godfrey and VST also closed in the red, down over 5 and 8 per cent respectively.
Cigarettes are categorised as “sin goods” and have been kept in the highest GST slab of 28 per cent, fairly in line with the weighted average VAT (value added tax) rate of 28.7 per cent levied in the earlier regime.
GST is India’s most ambitious tax reform since independence and subsumes over a dozen central and state taxes that were levied on goods and services earlier. The new tax regime is expected to add 2 per cent to the country’s GDP (gross domestic product) over a period of time.
Read this story in Malayalam