The stock could see more pressure in the near term on the ‘big tax shock”, Jefferies Financial Group Inc’s analysts, led by Vivek Maheshwari, wrote in a note, downgrading the stock to hold from buy.
Cigarettes will face higher excise duties ranging from 2,050 rupees to 8,500 rupees per 1,000 sticks from Feb 1, according to a government notification issued late on Wednesday.
Most market participants now expect some price increases to help offset the tax hike, potentially weighing on demand. An industry body warn the higher levies would hurt the tobacco business and fuel illicit cigarette trade. Higher-than-expected tax burden has stoked concerns over profitability of Asia’s second-largest cigarette maker.
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The move also roiled shares of other cigarette makers across the country. Shares of Godfrey Phillips India Ltd declined more than 20% in two sessions to Friday.
Analysts at Morgan Stanley said cigarette prices may need to rise by as much as 40% to fully pass on the impact of higher levies to consumers, likely leading to a decline in sales volumes.
“We believe the share price reaction already reflects the impact, but stock outperformance could return only once the market is convinced that the volume slowdown has bottomed out,” the analysts wrote in a note.
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