GST rate cut: What’s in store for 36 lakh ITC shareholders? Jefferies analysts decode – News Air Insight

Shares of FMCG major ITC, which earns a major chunk of its profit from cigarettes, have not given any returns to shareholders in the last two years as investors are worried about uncertainty around GST and cess, stake sale by BAT, and the rise of Marlboro. As the GST Council meeting begins today to rationalize rates, Jefferies expects revenue neutrality for the tobacco industry.

“Based on our industry interactions, we believe that the government intends to maintain revenue neutrality. This means that whatever head replaces the compensation cess, the overall tax burden on cigarettes may not change, which we would see as a relief for ITC,” Jefferies analyst Vivek Maheshwari said.

He said a steady taxation policy helps arrest the rise of illicit cigarettes, as seen in the last few years, where organised industry volume growth has been steady.

Currently, cigarettes are taxed at 28% GST plus a compensation cess, which is a mix of specific and ad valorem duties. The specific cess varies from Rs 2.1 to Rs 4.2 per stick, depending on the cigarette’s length and also has a component of ad valorem, which is 5% on length up to 74-mm and 36% for 84mm.

On a weighted average basis, the consumer price of ITC’s cigarettes comprises 55% tobacco taxation, 12% channel margins, and 23% profit (Ebit) margin.

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As the GST Council meets on September 3 and 4 to decide on tax cuts across several categories, it may also decide on the future of compensation cess, which is scheduled to end in March 2026.

“In current structure, nearly two-thirds of the taxes are specific while the other one-third are ad valorem. We note that not only revenue neutrality is important, so is the share of specific and ad valorem. This is because specific taxes are fixed per stick and do not rise with product price increases, driving pricing leverage on margins. In contrast, ad valorem taxes rise with price, so any hikes by ITC result in a higher tax outgo,” Jefferies said in a report.

The brokerage is bullish on ITC but said it expects the stock to be range-bound until there is clarity on the revised tax regulations.

“Beyond this, we note investor concerns around the BAT stake overhang and market share gains by GPI (Godfrey Phillips India). Valuations remain attractive at 23x 1yr fwd PE,” it said.