Shares of ITC plunged nearly 5% in Thursday’s session, January 1, falling to around Rs 386, as tobacco stocks came under heavy selling pressure after the government formally notified higher taxes on tobacco products and pan masala, triggering a sharp reassessment of earnings visibility.
What triggered the sharp fall in ITC shares?
The decline comes after the government notified February 1 as the implementation date for additional excise duty on tobacco products and a Health and National Security Cess on pan masala, replacing the existing GST compensation cess.
From February 1, cigarettes, chewing tobacco, and similar products will attract a 40% GST, while biris will be taxed at 18% GST. These levies will apply over and above excise duty, increasing the overall tax incidence on tobacco companies.
The notification removed uncertainty around timelines and confirmed the quantum and structure of the new levies, which appears to have prompted aggressive selling in cigarette stocks.
Earlier optimism gave way to sharp correction
Earlier in December, tobacco stocks, including ITC, had remained relatively resilient despite Parliament approving two Bills that enabled the new tax framework. Investors were expecting a largely neutral transition from the compensation cess to excise duty.
However, Wednesday’s notification clarified that the effective tax burden would be higher than earlier anticipated, triggering a sharp correction.
Sell-side view: setback worse than initially feared
Sell-side analysts flagged the development as prima facie negative for ITC, describing the outcome as worse than feared initially.
According to analysts, the impact stems from:
- A sharp increase in effective tax incidence
- An unfavourable mix shift toward Kings over DSFT, which could pressure margins
- Reduced pricing flexibility in the near term
Analysts said the combination of higher taxes and an adverse product mix makes the near-term outlook challenging, even before factoring in demand elasticity.
Why ITC is particularly impacted
ITC derives a significant portion of its profitability from the cigarette business. Any increase in taxation directly affects:
- Realisations
- Margins
- Volume stability
With clarity now emerging on the structure and implementation timeline of the new levies, investors appear to be factoring in earnings risk, leading to outsized selling pressure compared with other FMCG names.
Bottom line
ITC shares are under pressure after confirmation of higher tobacco taxes, with sell-side analysts flagging a worse-than-expected outcome due to the magnitude of the tax hike and an unfavourable product mix shift. With the new tax regime set to take effect from February 1, tobacco stocks are likely to remain volatile as markets reassess earnings assumptions.
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