Edelweiss Securities sees cigarette prices going up 8-9% following a hike in effective tax under GST by 10-11%
For cigarette makers, all the gains in the stocks post GST has gone up in smoke in a matter of a day.
Industry leader ITC was hammered down by more 12% on the bourses on Tuesday with the GST Council hiking the compensation cess on the filter and non-filter cigarettes.
With this, the diversified conglomerate that derives half of its revenues from tobacco lost all the gains seen since the pre-GST days after touching a high of Rs 342 earlier this month.
Godfrey Phillips, the other cigarette maker, lost more than 5% on Tuesday, closing at Rs 1157 down from Rs 1,285 touched on July 3.
Most of the large brokerage houses have downgraded the stock on the expectation that ITC would be forced to raise prices of its cigarettes leading to a fall in volume and drop in profitability.
Edelweiss Securities sees cigarette prices going up 8-9% following a hike in effective tax under GST by 10-11%.
"In the past (FY13-16), when the hike in tax was 18% on an average, ITC's volumes declined 20% over the period. Accordingly, we cut our cigarette volume estimates for FY18/19 to 5%/2% year-on-year (yoy) decline versus 5% growth, respectively. We cut EPS estimates by 5.6%/8.2% yoy for FY18/19 respectively," research analyst Abneesh Roy of Edelweiss said in a research note.
ITC scrip may remain under pressure long after the GST storm has blown away as Edelweiss believes the current move of the GST Council indicates a shift in the softer strategy of the government in taxing the tobacco sector.
"Government's move to hike taxes to more than pre-GST levels brings to fore its negative stance on the sin sector. The Budget had sprung a positive surprise with mere 6% tax hike (lowest hike in past six years) coupled with the relatively softer stance in earlier GST. A negative surprise on taxation front coupled with uncertainty will keep the stock under pressure," the report said.
ICICI Securities expects ITC to take a price hike of around 12% this year to pass on the additional tax burden.
"We believe the change will increase the indirect tax incidence on the company by 22%. Post the revision in rates, we are factoring in 1% volume growth for both FY18 and FY19. Further, to pass on the tax burden, we estimate that ITC would have to take 12% and 8% price hike for FY18 and FY19, respectively," Pankaj Pandey, head of research, said.
While downgrading the stock to sell, brokerage house CLSA expects a minimum 5% rise in prices of cigarettes.
"Sharp rise in king size filter segment may force ITC to explore longs 74mm as an option to optimise tax and protect volumes but over time. For now, we estimate around 10% hike in taxes from pre-GST levels and ITC would need to raise prices by around 5% just to maintain net realisations. A higher price hike would be required to grow earnings which may also impact volumes," it said in a note.
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Edelweiss Securities sees cigarette prices going up 8-9% following a hike in effective tax under GST by 10-11%.
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