Tobacco tax hits share values

ITC, 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 12% in Mumbai trade, erasing €6.5bn from the company’s market value. Godfrey Phillips India Ltd, which counts Philip Morris International as an investor, tumbled 3.7%. The government this week increased the levy on cigarettes by as much as 10%.

The higher levies prompted CLSA to ask its clients to sell ITC, while Credit Suisse, 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 this month was handing a windfall to cigarette makers, Finance Minister Arun Jaitley had said.

“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, Mumbai-based managing director of TCG Advisory Services, which manages about €2.6bn of global assets.

“The lack of regard for a company’s business planning provides a window into the government’s thinking.”

Levies on tobacco products comes a fortnight after the nation rolled out the new goods and services tax, which unifies 29 states into a single market for the first time. The GST regime, aimed at widening the tax net, is India’s most sweeping tax overhaul since independence.

The duty on large cigarettes has been increased to 36% with producers being asked to pay an additional levy of 4,170 rupees (€56.50) per thousand sticks, according to a statement from the finance ministry. The previous rate was 31%. Higher taxes will prompt ITC and Godfrey Phillips to raise prices by as much as 9%, according to the brokerages.

CLSA is “forced to downgrade to sell as earnings outlook weakens,” the brokerage said in a note on Tuesday. “Higher price hike would be required to grow earnings, which may impact volumes. The outcome is negative from the neutral stance that the government mentioned.”

The stock, which has the fourth-highest weighting in India’s S&P BSE Sensex, had rallied 5.8% on July 3 when the GST had reduced cigarette taxes originally by about 9%. “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.

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