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ITC shares gains could go up in smoke if tobacco taxes rise in Budget

October 23, 2021 12:24 PM

ITC shares gains could go up in smoke if tobacco taxes rise in Budget

Investors in cigarette-to-hotel conglomerate ITC shares might have to endure a phase of renewed uncertainty as worries about higher taxes on tobacco could put a lid on gains. The government’s recent decision to form an expert group with representation from other ministries, which will suggest tax rate options on all tobacco forms in the upcoming Union Budget on February 1, took the wind out of the ITC stock’s sails just as it looked like the share price was poised to catch up with the rest of the market.

Analysts see a high probability of a tax hike on cigarettes in the upcoming Budget.

“Cigarette taxes did not see any increase in last year’s Budget so that’s why we see a high probability of a hike in cigarette taxes in the upcoming budget… ITC, Godfrey Phillips and VST Industries could see an overhang if the recommendation is harsh,” said Abneesh Roy, vice-president-institutional equities at Edelweiss. He has a hold rating on ITC with a target price of RS 241.
ITC shares, which ended down 0.7% at ₹244.90 on Thursday, have declined 4.5% since the announcement of the expert group on tobacco was made.

Also Read : ITC’s corrects 6% after 26% rally. What should investors do now?

Roy said if there is a high tax hike beyond 10%, it will be a negative for cigarette companies.

ITC shares had seen a technical breakout in September after moving in a range of Rs200-220 for several months. From a low of RS 199.1 hit in early May – which is ITC’s calendar year low – the stock touched a 52-week high of RS 265.3 on Monday. The stock is up about 15% from mid-September.

Analysts said it will be critical for the stock to stay above RS 230 to ensure it does not slide lower.

“There is long term potential as it has given a breakout above RS 230. RS 255-260 will be a hurdle in this derivatives series, RS230 is a major support area,” said Rajesh Palviya, head-technical and derivatives at Axis Securities.

Analysts at Jefferies said ITC could move in a range as the news flow has raised uncertainty till the budget.

For the group, cigarettes continue to be its mainstay business though it is strengthening its presence in consumer goods. It is a market leader in the cigarettes segment with brands such as Classic and Gold Flake.

The stock has been an underperformer in recent years on worries about global investors’ increased aversion to businesses like tobacco that do not conform to Environmental, Social and Governance (ESG) standards. Investors have also been concerned about the group’s capital allocation to businesses like hotels.

An aggressive tax hike on cigarettes remains a risk on the downside, said Jefferies. “It is near-impossible to predict what the expert group would recommend and what the government will implement at this stage. However, this has clearly raised concerns on tobacco taxation in the run-up to the budget,” said Jefferies.

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