ITC shares fell 10% to Rs. 50,000 crore destroyed, worst day in 6 years. Should investors buy fear?

Shares of India’s largest cigarette maker ITC suffered their biggest one-day decline in nearly six years on Thursday after the finance ministry imposed a sharp new tax on cigarettes late on Wednesday, with the stock tumbling 10% and a market capitalization of Rs. 50,000 crore was destroyed.

During the session the share was Rs. It tumbled to a 52-week low of 362.7 as investors scrambled to assess the fallout from excise duty rates that could force a price hike of at least 15%.

Godfrey Phillips India, the country that sells Marlboro cigarettes, fared worse, falling 19% in its steepest decline since November 2016.

The carnage was imposed by the Finance Ministry at Rs 1,000 per cigarette stick. 2,050 to Rs. 8,500 following the notification of excise duty, depending on the length, effective from February 1. This levy comes on top of the existing 40% Goods and Services Tax (GST), which has led to war losses and massive loss pressures.

“There are still many unknowns, but our calculations suggest that the tax increase could be more than 30% if the NCCD continues; if the NCCD is submitted, the impact should still be more than 20%,” Jefferies said in a note, calling the development a “clear negative”.

The brokerage warned that the ITC may need to raise prices by at least 15%—if not more—to pass on the overall impact to consumers, potentially increasing the trade in illegal cigarettes.

Analysts at ICICI Securities calculated an additional duty of 22%-28% in the overall cost of 75-85 mm cigarettes. “Cigarettes longer than 75 mm account for around 16% of ITC’s volume and the levy is likely to increase prices by Rs 2-3 per stick,” they said.

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The tax shock comes when the government’s compensation cess period is nearing its end. Jefferies noted that the revised GST rate on tobacco was recently increased to 40%, which will increase the impact of the ITC’s implementation of the price hike.

For investors suffering heavy losses, the key question is whether to buy on fear or wait for more clarity. “While we are still unsure of the final outcome, if confirmed, this would be a clear negative as volumes would be affected and concerns would also be raised over the risk of losing some volumes to the illicit industry,” Jefferies warned.

ITC, which controls the cigarette market with brands including Gold Flake, Wills Navy Cut and Classic, now faces the daunting task of balancing price increases with maintaining volume in a market already battling illicit trade.

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