Tobacco Tax U-Turn Burns $7 Billion Hole in ITC’s Market Cap (1)


(Bloomberg) — ITC Ltd., Asia’s second-largest cigarette maker by value, plunged the most in 25 years after India surprised investors by raising levies on tobacco products. The stock slumped 11 percent to 289.65 rupees at 10:47 Mumbai, erasing $7 billion from the company’s market value. Godfrey Phillips India Ltd., which counts Philip Morris International Inc. as an investor, tumbled 3.7 percent. The government on Monday increased the cess on cigarettes by as much as 10 percent.

The higher levies prompted CLSA Ltd. to ask its clients to sell ITC, while Credit Suisse Group AG, which said the duties were a “u-turn” from the government’s previous stance, cut its stock recommendation to neutral. Taxes on tobacco products were raised as the switch to a nationwide tax on July 1 was handing a windfall to cigarette makers, Finance Minister Arun Jaitley said Monday.

“The arbitrary nature of changing tax rates sends a negative signal that India continues to be infamous for its unstable tax policies,” said Chakri Lokapriya, the Mumbai-based managing director of TCG Advisory Services Ltd., which manages about $3 billion of global assets. “The lack of regard for a company’s business planning provides a window into the government’s thinking.”

To read more broker comments on ITC shares, click here Levies on tobacco products comes 18 days after the nation rolled out the new Goods and Services Tax, which unifies 29 states and 1.28 billion people into a single market for the first time. The GST regime, which is expected to widen the country’s narrow tax base and boost revenue, is regarded as the most important economic policy of Prime Minister Narendra Modi’s administration.

The levy on large cigarettes has been increased to 36 percent with producers being asked to pay an additional a duty of 4,170 rupees per thousand sticks, according to a statement from the finance ministry. The previous rate was 31 percent. Higher taxes will prompt ITC and Godfrey Phillips to raise prices by as much as 9 percent, according to the brokerages. CLSA is “forced to downgrade to sell as earnings outlook weakens,” the brokerage said in a note to clients on Tuesday. “Higher price hike would be required to grow earnings, which may also impact volumes. The outcome is clearly negative from the neutral stance that the government mentioned.” ITC shares have the fourth-highest weighting in India’s S&P BSE Sensex and NSE Nifty 50 Indexes. The stock had rallied 5.8 percent on July 3 as the GST had cut cigarette taxes by about 9 percent.

“While any reduction in tax incidence on items of mass consumption would be welcome, the same would be unacceptable in case of demerit goods like cigarettes,” the finance ministry said in a statement on Monday.

ITC did not immediately comment on the new taxes.