After 2 years of goldilocks period, will FY24 Budget be a boon or bane for ITC?

It’s this time of the year when one stock - ITC - definitely grabs investors’ attention as expectations build for a possible hike in taxes on tobacco and tobacco products in the run-up to the Union Budget.

While taxation of tobacco is primarily under the purview of the GST Council, the central government also levies a National Calamity Contingent Duty (NCCD) on cigarettes, which is subject to changes in the Budget.

This makes the Budget an important event for ITC stock, as cigarettes constitute more than 80% of the company’s net profit, and about 45% of its topline.

Historical performance of the stock prior to the Budget shows that ITC remained an underperformer due to growing apprehension among investors about a hike in taxes and its consequent impact on earnings. Prior to the budget, shares of ITC have given negative returns 7 times out of the last 12 Budgets.
So far in January, the stock has net gained just 0.2%. The scrip ended 0.6% higher on Tuesday at Rs 332.25 on the National Stock Exchange.

The worst fall for the stock was in February 2020 ahead of the Budget for 2020-21 (April-March). The stock shed nearly 9% on expectations of a steep hike in taxes. In the Budget for FY21, the government increased NCCD by 2-4 times across cigarette stick sizes, resulting in tax hikes of 9-15%.


Since then, the government has not made any changes to the taxes on cigarettes, but this time around, expectations are building in a hike.

NCCD accounts for about 10% of overall taxes on cigarettes, and brokerage Jefferies India is building in a 5% YoY growth in overall tobacco taxes.

If the quantum of hike in tax is around this level, then Jefferies believes ITC can absorb it by passing on to consumers and not seeing any major hit to volumes.

The sector has seen notable recovery in legal cigarette volumes this year, while most other parts of consumption have seen sharp inflation in the past three years.

According to Nuvama Institutional Equities, any hike below 12% on cigarettes is likely to be accepted by consumers.

“Any tax hike beyond 12% may have an adverse market dynamic impact, allowing space for illegal cigarettes to occupy market share,” the brokerage said in its report.


Stock Talk

Although the stock has given muted returns this month, it was one of the best performing index stock last year. In 2022, the stock has gained more than 52%, outperforming most of its peers and the benchmark index Nifty50. Any adverse move on the tax front by the government could be a party spoiler for ITC stock investors.

The organised players in India have seen recovery in volumes in the recent quarters, supported by stable taxation along with deterrent action by enforcement agencies, which enabled market share gains from illicit cigarettes.

Jefferies, too, pointed out that any steep tax hikes in the Budget will backtrack the efforts to check illicit trade, which will raise volume concerns for ITC and could also be a sentimental negative for the stock.

(Data input from Ritesh Presswala)

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