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Shares of ITC Ltd., Varun Beverages Ltd., VST Industries Ltd., and other companies linked to cigarettes and beverages dropped by up to 5%
Shares of ITC, Varun Beverages fall up to 5%
Shares of ITC Ltd., Varun Beverages Ltd., VST Industries Ltd., and other companies linked to cigarettes and beverages dropped by up to 5% on Tuesday, December 3, following reports about a potential GST rate revision across several categories.
Varun Beverages saw its stock fall by 5% to Rs 600 during intra-day trading, accompanied by heavy volumes. ITC’s shares also declined by 3% to Rs 462.80. Both ITC and Varun Beverages have experienced a correction of up to 12% from their respective record highs of Rs 528.55 and Rs 682.84, which were reached on September 27, 2024, and July 29, respectively.
Over the past three years, ITC’s stock price has surged by 110%, while Varun Beverages has seen an impressive rise of 424%. In comparison, the BSE Sensex has climbed 39% during the same period.
Varun Beverages is a major player in the beverage industry and one of the largest PepsiCo franchisees globally (outside the USA). The company produces and distributes a wide range of carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs), including packaged drinking water, all under PepsiCo’s trademarks.
PepsiCo’s CSD brands produced and sold by Varun Beverages include Pepsi, Pepsi Black, Mountain Dew, Sting, Seven-Up, Mirinda, Seven-Up Nimbooz Masala Soda, and Evervess. The NCB brands include Slice, Tropicana Juices (100% and Delight), Seven-Up Nimbooz, Gatorade, and Aquafina packaged drinking water.
ITC’s recent outperformance is largely due to an improved growth outlook, bolstered by a stable taxation regime following the implementation of GST.
In its FY24 annual report, ITC highlighted that cigarette taxes in India are significantly higher than in developed countries—14 times those in the USA, 7 times those in Japan, and 6 times those in Germany. These taxes are also substantially higher than those in neighboring countries.
ITC pointed out that steep tax hikes have historically hurt tax collections and legal cigarette volumes. Conversely, a stable tax regime has led to better tax revenue. The company also estimated that illicit trade in cigarettes causes an annual revenue loss of approximately Rs 21,000 crore to the government. Additionally, the illegal cigarette trade negatively impacts farmers and workers in the tobacco value chain.
Media reports indicate that the Group of Ministers (GoM) on GST rate rationalisation has recommended raising the tax rate on aerated beverages, cigarettes, tobacco, and related ‘sin’ products from the current 28% to 35%.
This proposal suggests the creation of a new 35% GST rate slab specifically for tobacco and related products, as recommended by the GoM.
However, higher taxes on cigarettes are expected to lead to a significant decline in cigarette volumes, as consumers become more price-sensitive, which could result in reduced sales. Additionally, consumers may shift to lower-priced counterfeit products.
“Over the years, discriminatory and punitive taxation on cigarettes has led to a progressive migration of consumption from duty-paid cigarettes to other lightly taxed or tax-evaded forms of tobacco products, including illicit cigarettes, bidi, chewing tobacco, gutkha, zarda, snuff, etc.,” ITC stated in its FY24 annual report.
What Happened In The Previous GST Meeting?
On July 23, Finance Minister Nirmala Sitharaman did not announce any changes to sin taxes in the Union Budget for 2024-25, leading to a surge in the stock prices of ITC and other tobacco companies. A stable taxation regime was seen as positive for the cigarette business, and Jefferies noted that the unchanged tobacco taxes provided relief for ITC. The last tobacco tax increase was 2% in February 2023. This stability allowed ITC to focus on volume growth with minimal price hikes.
The GoM’s proposal, however, comes as a surprise to market participants. Following ITC’s latest earnings report, brokerages had expected the company to report mid-single-digit cigarette volume growth in FY25. The GoM’s recommendation is now set to be discussed by the GST Council, chaired by the Finance Minister and her state counterparts, on December 21. A final decision on the potential tax changes will be made by the council, which could impact volumes going forward.
