Shares of conglomerate ITC Ltd witnessed a sharp sell-off on Friday, January 2, tumbling more than 5% to hit a fresh 52-week low. The steep decline was triggered by a new excise duty imposed by the government on tobacco products, dealing a direct blow to the company's lucrative cigarettes business.
Government Announces Fresh Levy on Cigarettes
The Finance Ministry issued a notification on Thursday evening, introducing a significant additional excise duty on cigarettes. According to the notification, the new duty will range from ₹2,050 to ₹8,500 per 1,000 sticks. This levy is separate from and will be applied over and above the existing 40% Goods and Services Tax (GST) that is already applicable on cigarettes, tobacco, and similar products.
Both the new excise duty and the existing GST component are scheduled to take effect from February 1. This move represents a substantial increase in the tax burden on tobacco products, directly impacting manufacturers like ITC.
Market Reaction and Stock Performance
The market's reaction was swift and severe. On Friday, ITC's stock price plunged over 5%, sliding to a 52-week low of ₹345.35 per share. This sell-off compounded losses from the previous trading session, where the stock had already declined by 10%. The double-digit drop over two sessions underscores investor concern about the immediate financial impact of the higher taxes on ITC's core revenue stream.
Analysts predict that the increased cost will likely be passed on to consumers, potentially dampening sales volumes. The news has created significant uncertainty around the near-term profitability of ITC's cigarettes division, which is a major contributor to the company's overall earnings.
Broader Implications for the Industry
The government's decision aligns with broader public health objectives to discourage tobacco consumption through fiscal measures. However, it presents a clear challenge for listed entities in the sector. The key implications are:
- Increased Consumer Prices: The combined effect of the new excise duty and GST will lead to a noticeable hike in retail cigarette prices.
- Pressure on Margins: If the company absorbs part of the tax increase, its profit margins will come under pressure.
- Volume Risk: Higher prices could lead to a reduction in sales volumes, affecting overall revenue.
Investors are now closely watching ITC's strategy to navigate this regulatory hurdle. The company's ability to manage pricing, possibly accelerate diversification into its FMCG, hotels, and agri-business segments, will be critical in mitigating the impact of this tax policy change. The market will be looking for management commentary in the coming days for further guidance.
