ITC slides to three-year low as tobacco excise hike prompts brokerage downgrades

Investors and market watchers have recently turned their attention to ITC Limited, a major player in the cigarette and consumer goods sector, following a sharp decline in its share price. This downturn comes in the wake of the Indian government’s decision to impose an increased excise duty on tobacco products starting February 1, 2024. The move has triggered widespread concern about the potential impact on ITC’s cigarette sales and overall profitability. As a result, many brokerage firms have revised their outlooks on the stock, reflecting a more cautious or bearish stance. Understanding these developments is crucial for stakeholders aiming to navigate the evolving market landscape.

Impact of the New Excise Duty on ITC’s Market Performance

The announcement of a higher excise duty on tobacco products has led to a significant drop in ITC’s share price, which closed at ₹350.1 on Friday, marking its lowest level sence February 2023. This represents a 3.8% decline on the day, following a nearly 10% plunge the previous session. The excise duty hike is expected to increase cigarette prices substantially, possibly reducing consumer demand. Brokerages have responded by downgrading their ratings for ITC, shifting from optimistic “buy” recommendations to more cautious or negative outlooks. This sentiment reflects concerns over the company’s cigarette volume and earnings before interest, tax, depreciation, and amortization (EBITDA) projections.

Financial Significance of the Cigarette Business for ITC

ITC’s cigarette division remains its most lucrative segment, contributing over 40% of the company’s total revenue and approximately 80% of its profits. Industry experts, including Sonam Srivastava, founder and CEO of Wright Research, have highlighted that the excise duty increase-potentially raising prices by 20-30%-could severely impact this core business. Despite growth in other areas such as fast-moving consumer goods (FMCG) and agriculture, these segments have yet to reach a scale sufficient to offset the anticipated decline in cigarette earnings.

Market Sentiment and Analyst Recommendations

Heavy trading volumes suggest institutional investors are selling off shares, reflecting a cautious market mood. Analysts like Mayank Jain from Share.Market advise investors to wait for clearer signals before re-entering the stock. A sustained weekly close above ₹400 is seen as a key indicator that the market has absorbed the tax news and that buying confidence is returning. Untill then, the stock is expected to remain volatile, with potential rallies facing resistance.Brokerage houses such as Motilal Oswal have downgraded ITC to “neutral” from “buy,” citing the loss of near-term catalysts and increased earnings pressure.

Looking Ahead: Strategic Considerations for Investors

While the recent price correction has been steep, some experts suggest that further declines could create attractive entry points for long-term investors onc the market stabilizes.Though, caution is advised until there is more clarity on how the excise duty hike will affect cigarette volumes and pricing strategies. The company’s ability to grow its non-cigarette businesses will also be critical in mitigating risks. Investors should monitor updates closely through February 2024, when more detailed financial impacts are expected to emerge.

Important Facts: key Points to Remember

• ITC Limited shares hit a three-year low, closing at ₹350.1 on February 2, 2024.
• The Indian government implemented an additional excise duty on tobacco products effective February 1, 2024.
• The excise duty hike is expected to increase cigarette prices by 20-30%, impacting demand.
• ITC’s cigarette segment accounts for over 40% of total revenue and 80% of profits.
• Nuvama downgraded ITC from “buy” to “hold” due to revised volume and EBITDA estimates.
• Motilal Oswal lowered its rating to “neutral” with a target price of ₹400.
• Institutional investors have shown heavy selling pressure amid uncertainty.
• Analysts recommend waiting for a weekly close above ₹400 before considering buying.
• Growth in FMCG and agricultural businesses is not yet sufficient to offset cigarette profit losses.
• Market clarity on the excise duty impact is expected by February 2024.

Frequently Asked Questions

Q: Why did ITC’s share price fall recently? The share price dropped due to the government’s announcement of an increased excise duty on tobacco products, which is expected to raise cigarette prices and reduce demand.

Q: How significant is the cigarette business for ITC? The cigarette segment contributes over 40% of ITC’s revenue and about 80% of its profits, making it the company’s most profitable division.

Q: What are analysts recommending regarding ITC stock? Most analysts suggest a cautious approach,advising investors to wait for the stock to stabilize and close above ₹400 before buying.

Q: Can ITC’s other businesses compensate for the cigarette segment’s losses? Currently, the growth in ITC’s FMCG and agricultural sectors is insufficient to fully offset the expected decline in cigarette profits.

Q: When will more clarity on the excise duty impact be available? More detailed facts on the financial impact is anticipated by February 2024, after the excise duty comes into effect.