GST impact: Brokerages cut ITC rating as cigarette cess knocks off 15% of share value

Brokerages were pessimistic on the outlook for ITC Ltd after the GST Council yesterday in an unusual move raised the cess on cigarettes, following the implementation of GST earlier this month. Several analysts downgraded their recommendation on ITC shares, which fell as much as 15% intraday, dragging the NSE Nifty down by 80-100 points in the morning trade to below 9,900 and widening the gap for the benchmark index from the milestone of 10,000 points that it has been eyeing for some time now.

Yesterday, the GST Council, in its first review meeting since the implementation of India’s biggest tax reform since independence, hiked the cess on cigarettes by Rs 485-792 per 1,000 sticks. This is in addition to the 5% ad valorem cess which continues.

ITC shares were trading down 11.44% at Rs 288.5 on BSE. The fall in ITC shares today was the biggest intraday decline in 25 years and wiped out Rs 45,000 crore from the market of the cigarettes-to-FMCG giant. ITC shares are now trading at pre-GST levels of March, giving up all the gains in the run up to the implementation of GST and after it. Other cigarette stocks too felt the same heat, with Godfrey Phillips falling 10.38% to Rs 1,100 and VST Industries declining 7.31% to Rs 3,300.

Research and brokerage firm CLSA cut its rating on ITC to ‘Sell’ citing “GST impact” while reducing the price target sharply to Rs 285 from Rs 417. ITC will have to hike prices sharply, which would impact volumes, CLSA said. Morgan Stanley too cut ITC’s rating to ‘equalweight’ with a target price of Rs 285. The brokerage cut its EPS estimate for ITC by 9-14% over FY2018-20, saying that it sees the impact of the increased cess on volume growth and valuations multiples.

Yet another brokerage Credit Suisse downgraded ITC to ‘Neutral’ from ‘Outperform’, and cut the target price on its shares to Rs 310 from Rs 400 on the impact of the increased cess under the new GST regime. Meanwhile, HSBCmaintained its already uninspiring ‘Hold’ rating on ITC shares, adding that it seems unlikely that last decade’s 15% growth will be replicated.

On the other hand, Macquarie Securities still seemed upbeat on ITC shares, as it maintained its ‘Outperform’ rating with a price target of Rs 340, even while cutting its EPS estimate by 8-10% for FY18/19E. The government’s u-turn on GST cess is a negative, Macquarie said. ICICI Securities said: “Government’s move to hike the cess on cigarettes has changed the equation for tobacco companies.”