ITC Share Price Surges Over 5% on No Tax Announcement for Tobacco; Nifty FMCG Rises 2.7%
ITC Share Price Surges Over 5% on No Tax Announcement for Tobacco; Nifty FMCG Rises 2.7%
The Union Budget 2024 has brought a significant surge in the share price of ITC, a diversified conglomerate with a substantial presence in the tobacco industry. Following the announcement that there would be no changes to the existing tax rates on cigarettes and other tobacco products, ITC's shares spiked by as much as 5%. By the close of trading, the stock was up 4.67%, settling at Rs 488.35 on the NSE.
Tobacco Taxation Stability: A Boost for ITC
Taxation on tobacco products is predominantly managed by the GST Council, although the central government imposes the National Calamity Contingent Duty (NCCD) on cigarettes, subject to adjustments in the Budget. The current stability in the taxation regime has been favorable for both the volume growth of the legal cigarette industry and tax revenues.
Analysts had predicted a continuation of the benign cigarette taxation, which has provided a positive outlook for ITC's stock. Bank of America (BofA) noted that the stable taxation environment has aided the legal cigarette market, contributing to volume growth and consistent tax collections.
Positive Market Response and Future Projections
The positive market response was echoed by analysts like Prabhudas, who stated, "We increase weight behind ITC by 50 bps as the current cigarette taxation environment will provide upside in the stock after long consolidation. A revival in FMCG and paperboard profitability from 2H25 and hotel demerger will further unlock value." Cigarettes account for over 80% of ITC’s net profit and about 45% of its revenue, making tax policies crucial for the company’s financial health.
Despite various tweaks in NCCD tax over the past decade, ITC shares have historically ended with positive returns on Budget days. The company’s cigarette business saw a volume recovery in FY23 and FY24, nearing peak volumes last seen in FY13. Stability in taxes, alongside government efforts to curb illegal cigarettes, has supported the legal market.
Motilal Oswal estimates suggest that ITC can achieve low- to mid-single digit cigarette volume growth with mid- to high single-digit EBIT growth in the medium term. Additionally, changes to the tax regimes are expected to result in consumer savings, benefiting FMCG stocks like ITC.
Jefferies' Upgrade and Market Implications
Jefferies India upgraded ITC Ltd to a buy rating, raising the target price to Rs 585 per share, a 25% increase from the current market price. This upgrade is based on the anticipation that GST taxes will remain stable until March 2026 as the center continues to settle state dues. The stability in tobacco taxation is seen as a significant factor driving this positive outlook.
Conclusion
The Union Budget 2024's decision to maintain the existing tax rates on cigarettes has been a boon for ITC, resulting in a substantial surge in its share price. The market’s positive response and optimistic analyst projections suggest a promising future for ITC, with stability in the tobacco taxation regime playing a crucial role. As the company continues to benefit from this favorable environment, investors are encouraged by the potential for continued growth and value creation in the medium term.
References:
- Union Budget 2024: ITC share price surges over 5% on no tax announcement for tobacco; Nifty FMCG rises 2.7%
- ITC Rs 500: Jefferies upgrades to 'buy' on no tobacco tax rejig in budget
- ITC shares jump 5% as cigarettes escape tax shocks in budget
- Jefferies upgrades ITC to 'buy' from 'hold,' hikes target price to Rs 585/share
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