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Cess on cigarettes wipes out Rs 48K cr from BSE in 1 day
The Goods and Services Tax Council’s decision to increase the cess on cigarettes triggered a sharp selloff in shares of tobacco companies with the ITC scrip falling by nearly 13 per cent on
Tuesday and investors losing nearly Rs 48,000 crore in a single day’s trading.
According to a report on moneycontrol.com, the total market capitalisation of ITC on the Bombay Stock Exchange (BSE) contracted from Rs 3,96,171.25 crore recorded on Monday to Rs 3,48,629 crore on Tuesday, which translates into a notional loss of Rs 47,542 crore. ITC which holds a weightage of 7.2 per cent in the Sensex was the biggest contributor to the decline in the index.
Other cigarette stocks Godfrey Phillips and VST Industries also tanked by up to 7.83 per cent.
After the GST Council raised the cess on cigarettes on Monday, many brokerages revised their estimates on the downside. The Foreign Portfolio Investors (FPIs) are among the major stakeholders in ITC, followed by insurance major LIC. FPIs hold 19.99 per cent stake in ITC as per shareholding data for the quarter ended June, followed by LIC which holds 16.25 per cent and financial institutions or banks which have 9.18 per cent stake.
Both FPIs and LIC pared their positions slightly on a sequential basis. The last shareholding data suggests that FPIs’ stake in ITC at the end of the March quarter stood at 20.04 per cent which was higher than 19.99 per cent recorded in the June quarter, BSE data showed.
The LIC’s stake in ITC stood at 16.26 per cent for the quarter ended March, which was slightly higher than 16.25 per cent recorded in June, data showed.
Credit Suisse downgraded ITC to ‘Neutral’ from ‘Outperform’ and also slashed the target price to Rs 310 from Rs 400 following cut in Financial Year 18-20 estimates by 10-12 per cent.
Morgan Stanley, too, downgraded the stock to ‘Equal-Weight’ from ‘Overweight’ and reduced target price to Rs 285 from Rs 395, saying it is a clear negative with obvious impact on volume growth and valuation multiples.
According to the research house, ITC will need 12-13 per cent weighted average cigarette price hike to offset the tax increase.
Meanwhile, the Tobacco Institute of India (TII) said the decision to increase cess on cigarettes will put severe pressure on the industry and also impact tobacco farmers. The development will also give a fillip to smuggling and illicit cigarette trade in the country, it added.
The TII further said the industry is already reeling under a huge tax burden on account of the continuous increase in excise duties on cigarettes, which have cumulatively gone up by 131 per cent over the last six years.
“The escalation in cigarette taxation will lead to a further increase in the already huge arbitrage opportunity and provide an enormous incentive to smuggling syndicates who often fund terror groups,” it said.
Stating that the tobacco farmers are already under severe pressure due to the fall in demand, TII said the increase in taxation and the drop in legal cigarettes will have a debilitating impact on the farmers whose livelihoods are inextricably linked to the legal cigarette value chain.
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