GST Impacts Cigarette Makers For The Worse, With ITC Leading The Pack



Nirmal Singh Lotus Green

Cigarette manufacturers were badly hit on the stock market yesterday, with market leader ITC falling down to as much as 15 per cent to Rs. 276.90  on the BSE which reduced its market value to Rs. 3.37 lakh crore from Rs. 3.96 lakh crore the day before. The slump is a result of the GST panel hiking of compensation cess on cigarettes.
The Sensex reached as much as 450 points and Nifty slipped down to 9792.05. Major losses were led by ITC, which has the second highest weightage (7.65 per cent) in Nifty. According to calculations by Nirmal Singh Lotus Green, ITC’s cigarette division contributes nearly two-thirds of the FMCG (fast moving consumer goods) total revenue. However, over 60 per cent of its business comes from cigarettes.
Experts at Nirmal Singh Lotus Green say that the increase in cess is going to be negative for ITC. The increase in overall taxes is going to impact cigarette volume and earnings adversely.
"For now, we estimate 10 per cent hike in taxes from pre-GST levels and ITC would need to raise prices by 5 per cent just to maintain net realisations. Higher price hike would be required to grow earnings which may also impact volumes,” said an expert from Nirmal Singh Lotus Green.

Nirmal Singh Lotus Green


"In reality, this hit would be passed on to consumers through price-hikes. We estimate the need to do so by 15-16 per cent in the Kings segment and 8-10 per cent in the rest of the portfolio,” he further added.
The compensation cess on cigarettes contains two components: an ad valorem tax of 5 per cent and another numerical cess on each category of filter and non-filter categories. The ad valorem has remained the same but the numerical cess related to the length of the cigarettes has been increased by the council.
The numerical cess has been increased to Rs. 2076 per 1000 units for non-filter 65 mm cigarettes and to Rs. 3668 per 1000 units for non-filter 65-70 mm cigarettes. For the filter category, it has been increased to Rs. 2076 per 1000 units for 65 mm cigarettes, and to Rs. 2747 per 1000 units for 65-70 mm cigarettes.
It is still however unclear whether the cigarette makers will increase the prices or not. However, experts at Nirmal Singh LotusGreen believe that the companies will have to increase prices to protect margins.

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