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ITC's market cap crosses Rs 4 lakh cr on GST trigger: Should you buy?

Tax incidence for ITC's cigarette segment under the GST regime is likely to come down

Puneet Wadhwa  |  New Delhi 

ITC's GST trigger: Should you buy?

Ltd hit a high of Rs 354.8 on the National Stock Exchange (NSE) in intra-day deals on Monday with its market-capitalisation (m-cap) crossing the Rs 4-lakh crore mark. Of the 294-point gain in the S&P BSE Sensex at 2:30pm, ITC’s contribution stood at a huge 172 points, BSE data show.

The rally in the counter comes on the back of implementation of goods and services (GST) bill last week, which analysts say, is likely to positively impact the company going ahead given the changes in the structure for

Also Read: Consumer stocks' valuation at new high

ITC, which also operates in branded packaged foods, hotels, paperboards, agri-related products among various other businesses, derived nearly 62.7% of its FY16 turnover from the business segment, AceEquity data show.

Analysts at Nomura, for instance, believe that incidence for ITC’s cigarette segment under the regime is likely to come down due to removal of dual taxation. Earlier, value added (VAT) was applied on the MRP, which included excise duty as well. This, Nomura, believes, could see a possible price reduction in the range of 5-6%, which could boost cigarette volumes.

Also Read: Impact on cigarette to be neutral under GST regime

Another positive for ITC's cigarette business segment, according to analysts, is the recent government notification that there will be no levy of any additional duty of excise on However, there is no clarity yet on whether the current 'National Calamity Contingent Duty' (NCCD) will be levied in addition to the

Also Read: ITC to venture into new FMCG category every quarter

In the scenario that NCCD is levied at the existing rate, Nillai Shah and Indira Badrinarayan of expect around 4% reduction in cigarette taxes and around 2% price flexibility for  

"However, in the event that NCCD is not applicable on cigarettes, we see a higher 7% reduction in cigarette taxes and around 3.5% price flexibility. We note that under GST, incidence on the supply chain will rise, which would mean that will increase distributor margin by around 2 percentage points," they said in a recent note on the company.

They expect the stock to react positively to this development, even as clarity on NCCD is likely to emerge over the next few days.

Also Read: Cigarettes puff up sentiment towards ITC

“The debate on government policy on has been turned on its head – investors expected the government to be particularly harsh on cigarette consumption, but it now appears that a spurt in illicit cigarette trade and a shift in favour of less tax-efficient forms of tobacco may have challenged the popular notion of a relatively easy increase in collection from the category – leading to a look beyond the obvious health concerns,” they add.

Given the recent rally in the stock, analysts now remain cautious on the stock. Thus far in calendar year 2017 (CY17), has gained around 43% as compared to 17% rally in the S&P BSE Sensex and 32% rise in the BSE index.

“I don’t think the stock merits an investment at the current levels. It has run up too fast, too soon. That apart, there is no guarantee that the government will not increase the on going ahead. Moreover, the company’s other businesses are also not doing exceedingly well,” cautions G Chokkalingam, founder and managing director of & Advisory.

Also Read: ITC to open boutiques for Fabelle luxury chocolate brand in Delhi, Kolkata

Despite all positives and remaining overweight on the stock, has a target price of Rs 310 on ITC’s stock. Nomura, on the other hand, sees an upside potential of 14% from its recommended buy price of Rs 311 in its June 30 report.
Exhibit 1: Scenario outlining potential fall in cigarette taxes under GST
KSFT - Current structure Rs per stick
Retail price - current 14
Distributor margin (assumed at 10%) 1.4
VAT 2.4
gross revenues 10.2
Excise 4.4
net revenues 5.7
paid by distributor 2.7
Less offset 2.4
Net paid by distributor 0.3
Net distributor margin 1.1
Total under current structure 7.1


KSFT - Under GST
Scenario 1
net revenues (Similar to current net revenue) 5.74
- Specific component (with NCCD) 4.4
- Ad Valorem component 1.9
Distributor Invoice value 12
Distributor margin (assuming more than 20% increase by ITC) 1.7
paid by distributor 0.6
Net distributor margin (similar to current margin) 1.1
Retail price 13.7
Around 2% price flexibility; around 4% fall in incidence
Total paid under GST 6.9


Scenario 2
net revenues (Similar to current net revenue) 5.74
- Specific component (without NCCD) 4.2
- Ad Valorem component 1.9
Distributor Invoice value 11.8
Distributor margin (assuming more than 20% increase by ITC) 1.7
paid by distributor 0.6
Net distributor margin (similar to current margin) 1.1
Retail price 13.5
Around 3.5% price flexibility; around 7% fall in incidence
Total paid under GST 6.6
Table Source: research report
Note: (specific and ad-valorem) based on schedule

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