Cigarette Price Increase: GST Panel Proposes 35% Tax Hike - ITC, Varun Beverages, and Tobacco Stocks Face Pressure
In Nutshell:
- The proposed 35% GST hike on cigarettes and aerated beverages could hurt stocks like ITC, Varun Beverages, and others.
- The tax increase could raise prices, reduce volumes, and push consumers to cheaper alternatives.
- ITC may have to hike cigarette prices, while Varun Beverages could face higher production costs.
- The GST Council’s decision on December 21, 2024, will likely determine the fate of the proposal and these companies.
Cigarette Price Increase: Shares of major tobacco and beverage companies, including ITC, Varun Beverages, Godfrey Phillips, and VST Industries, saw a sharp decline on December 3, 2024, following news of a proposed 35% GST hike on cigarettes, aerated drinks, and other sin goods. The Group of Ministers (GoM) on GST rate rationalisation has recommended a tax increase that could significantly impact these industries, which are already grappling with price sensitivity and competition.
How ITC and Varun Beverages Could Be Affected
For ITC, cigarettes account for a significant chunk of its revenue—around 40% of its topline in Q2 2024. A proposed 35% GST hike could force the company to increase cigarette prices, which could, in turn, affect demand and volumes. As a result, analysts predict that ITC might see reduced profitability if higher taxes lead to consumers switching to cheaper alternatives, such as non-duty paid tobacco products.
Macquarie analysts, who have set a target price of ₹560 for ITC, suggest that the company may have to hike cigarette prices by 5-7% to cover the tax hike. While ITC remains a strong player in the market, these adjustments could hurt its earnings and lead to lower volumes, especially if demand drops as a result of price hikes.
Varun Beverages, on the other hand, may face rising production costs due to the proposed 35% GST hike on aerated drinks like Pepsi and Mirinda. As one of PepsiCo’s largest bottling partners, Varun Beverages could see lower demand for these products if consumers opt for more affordable alternatives. This could lead to stock volatility in the near future.
What About Other Tobacco and Beverage Stocks?
Tobacco stocks like Godfrey Phillips and VST Industries are also at risk of facing similar headwinds. Both companies generate a large portion of their revenue from the tobacco business, and any rise in taxes could force them to raise prices, affecting volumes and profitability. Godfrey Phillips and VST Industries had slight stock increases on December 2, 2024, but this news could bring a sense of uncertainty to their future prospects.
The proposed tax hike would not only affect the pricing strategies of these companies but also put pressure on their long-term growth. The higher taxes may encourage further shifts to illicit tobacco products, which could erode the market share of legitimate players.
Investors Remain Cautious as December 21 Decision Looms
Following the news of the proposed 35% tax increase, investor sentiment shifted, with cautiousness becoming the prevailing theme. ITC shares closed almost unchanged on December 2, 2024, while Varun Beverages saw a slight rise. However, the potential for a price hike and lower volumes has investors on edge.
The GST Council is scheduled to discuss the proposal on December 21, 2024. Should the tax increase be approved, it could force companies to rethink their pricing strategies and lead to heightened market volatility. As such, investors need to stay alert to the outcome of the council’s decision.
Also Read: Bad News for Smokers: GST Panel Proposes Major Tax Hike on Cigarettes and Tobacco - Read Now
