India's largest institutional investor, the Life Insurance Corporation of India (LIC), has suffered a massive erosion in the value of its investment in ITC Ltd. The value plummeted by a staggering Rs 10,445 crore over just two trading sessions. This sharp decline followed a steep hike in cigarette duties announced by the government, which triggered a heavy sell-off in the FMCG major's shares.
The Tax Shock That Sparked the Sell-Off
The finance ministry's notification on Wednesday, February 1, introduced a revised excise duty structure for cigarettes. Under the new regime, duties will range from Rs 2,050 to Rs 8,500 per 1,000 sticks, depending on their length. This move sent immediate shockwaves through the tobacco sector, leading to intense selling pressure on cigarette stocks, with ITC bearing the brunt.
LIC, which held a 15.86% stake in ITC (approximately 199 crore equity shares) as of the September quarter, saw its investment value nosedive. ITC's shares crashed to a three-year low of Rs 345.35 on Friday before closing at Rs 350.10, marking a fall of 3.8% for the day. Cumulatively, the stock has tumbled 14% over the past two trading days.
Brokerages Downgrade, Warn of Steep Price Hikes
The dramatic correction prompted several leading brokerage firms to downgrade ITC's stock and issue cautious outlooks. Motilal Oswal Financial Services described the tax increase magnitude as "staggering," estimating that cigarette taxes would rise by about 50%. The brokerage downgraded ITC from 'Buy' to 'Neutral,' slashing its target price to Rs 400. It warned that ITC would need to implement portfolio-level price hikes of at least 25% just to maintain current net realizations.
Global brokerage Jefferies was equally pessimistic, downgrading the stock from 'Buy' to 'Hold.' It stated that to offset the tax burden, ITC would need a substantial 40% price hike, assuming no change in product mix. Jefferies added a dire warning: if ITC passes on the full impact, the effective tax hike could reach 70%, pushing tobacco taxes from 55% to 65% of the maximum retail price per stick. The firm concluded that the "near-to-medium term upside now looks capped" and the stock could face further pressure.
Mounting Pressure on a Struggling Stock
This tax-induced crisis adds fresh uncertainty to ITC's outlook, which was already under significant pressure. Even before this latest development, ITC shares had declined about 28% over the past one year. The government's decision has now introduced a new major headwind for its core cigarettes business, which contributes a significant portion of its profitability.
The event highlights the substantial risks faced by large institutional investors like LIC when regulatory changes directly impact their key holdings. The market will now closely watch ITC's strategy to navigate this heightened tax environment and its ability to protect margins without severely impacting sales volumes.
