Budget 2023: ITC recovers sharply even as FM hikes NCCD on cigarettes by 16%

Shares of ITC recouped intraday losses after a kneejerk negative reaction to the hike in duty on cigarettes in the Budget FY24, as the impact of the same on the overall volumes for the company is expected to be limited, according to analysts.

The government hiked the National Calamity Contingent Duty (NCCD) on cigarettes by 16%. NCCD accounts for about 10% of overall taxes on cigarettes.

While taxation of tobacco is primarily under the purview of the GST Council, the central government also levies NCCD on cigarettes, which is subject to changes in the Budget.

The government had left this duty untouched for two years. In the Budget for FY21, the NCCD was raised by 2-4 times across cigarette stick sizes, resulting in tax hikes of 9-15%.

For ITC, cigarettes constitute more than 80% of the company’s net profit, and about 45% of its topline. Therefore, tinkering in taxes has an impact on the company’s financials.

According to ICICIdirect, the net tax on cigarettes would increase by 0.07-0.12% a stick, which would require a 1-3% hike in the prices of cigarettes across different categories.

“The hike in taxes is not very high and would be easily passed on by small increases (1-3%) in prices,” the brokerage said.

Jefferies India, too, believes that the effective hike in tax on cigarettes would be 3.5%, resulting in a 1.5-2% increase in prices, at best.

Therefore, analysts do not foresee any significant impact on the sales volumes of cigarettes.

Shares of ITC ended 2.6% higher at Rs 361.4 after falling by over 6% intra-day. However, VST Industries and Godfrey Phillips remained weak, shedding 2.1% and 5.4%, respectively.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)