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Shares of India’s largest cigarette maker, ITC,suffered their steepest single-day decline in nearly six years on Thursday. Shares crashed 10%, wiping out over Rs 50,000 crore in market capitalization after the Finance Ministry imposed a sharp new tax on cigarettes late on Wednesday.
Significant Stock Declines
The stock plummeted to a fresh 52-week low of Rs 362.7 during the session as investors scrambled to assess the damage from excise duty rates that could force price increases of at least 15%.
Godfrey phillips India, which sells Marlboro cigarettes in the country, fared even worse, crashing as much as 19% in it’s steepest fall since November 2016.
Details of the New Tax
The market reaction followed the finance ministry’s notification of excise duties ranging from Rs 2,050 to Rs 8,500 per 1,000 cigarettes, depending on length. This substantial increase is expected to significantly impact the profitability of cigarette manufacturers.
Impact on the industry
- Price Increases: Manufacturers will likely pass on the increased tax burden to consumers through higher cigarette prices.
- Volume Decline: Higher prices could lead to a decrease in cigarette consumption as consumers seek cheaper alternatives or reduce their overall smoking habits.
- Market Share Shifts: The tax changes could perhaps alter the competitive landscape within the cigarette industry.
Investor Reaction and Future Outlook
The immediate reaction from investors was overwhelmingly negative, reflecting concerns about the future earnings potential of these companies. Analysts are currently evaluating the long-term implications of the tax hike and revising their forecasts accordingly.
Key Takeaways
- ITC experienced its largest single-day stock decline in almost six years.
- Godfrey Phillips India saw an even more dramatic drop, its worst since November 2016.
- The new cigarette tax is expected to raise prices and potentially reduce consumption.
- Investors are reassessing the financial outlook for cigarette manufacturers in India.