In a move that sent shockwaves through the stock market, shares of major cigarette manufacturers ITC Ltd and Godfrey Phillips India Ltd witnessed a steep decline on Thursday. The sell-off was triggered by the government's announcement of an increase in the National Calamity Contingent Duty (NCCD) on cigarettes in the interim budget for 2024-25.
Budget Announcement Triggers Market Sell-Off
Finance Minister Nirmala Sitharaman, while presenting the interim budget, proposed an upward revision in the excise duty levied on cigarettes. The National Calamity Contingent Duty (NCCD) on cigarettes has been raised by 16% for cigarettes exceeding 65 mm but not exceeding 70 mm in length, and by nearly 8% for cigarettes exceeding 70 mm but not exceeding 75 mm. This duty hike is set to take effect from February 1, 2024.
The market reaction was swift and severe. ITC's stock price tumbled by as much as 4.5% during the trading session, while Godfrey Phillips India faced an even steeper decline, plunging over 6%. This sharp correction reflected investor concerns over the immediate impact on the companies' profitability and sales volumes in a price-sensitive market.
Immediate Impact on Share Prices and Market Sentiment
The announcement directly hit the stocks of companies with significant exposure to the cigarette business. ITC, a diversified conglomerate, still derives a substantial portion of its revenue from its cigarettes segment. Godfrey Phillips India is another key player in the tobacco products market.
Analysts pointed out that such duty hikes typically lead to manufacturers passing on the increased cost to consumers through higher cigarette prices. This, in turn, can dampen consumption, especially among price-sensitive smokers, potentially affecting sales volumes for these companies. The stock market's negative response was a direct pricing-in of these anticipated headwinds for the sector's near-term financial performance.
Broader Context and Long-Term View
This is not the first time the government has used taxation as a tool for both revenue generation and public health objectives in the tobacco sector. Regular increases in excise duties on cigarettes have been a consistent feature of Union budgets over the years. The industry has historically absorbed or passed on these costs, navigating the regulatory environment.
For a company like ITC, its diversified portfolio spanning FMCG, hotels, paperboards, and agri-business provides a cushion against volatility in any single segment, including cigarettes. However, the cigarettes division remains a major cash cow, and any significant pressure on it weighs heavily on overall investor sentiment and the stock's valuation in the short term.
The duty hike comes into force immediately, from the start of February, giving companies little time to adjust their strategies. Market participants will now closely monitor the companies' next moves regarding pricing and their commentary on demand elasticity in the coming quarterly results.
