ITC charts growth strategy as cigarette tax hike hits stock

The nearly 70% recent increase in cigarette taxation has weighed heavily on ITC Ltd's share price, prompting the company to "roll up its sleeves" to counter the impact through calibrated price increases, a slew of new product launches in the cigarette category and higher investments in its non-cigarette businesses, chairman and managing director Sanjiv Puri said.

"The drop in the share price has been consequent to the changes in cigarette taxation since February. This has been a historical trend. Before the tax hike, ITC's share price had crossed Rs 400," Puri told shareholders while addressing the Kolkata-based conglomerate's 115th annual general meeting, held virtually on Thursday.

ITC's stock had touched a 52-week high of Rs 426.5 on the BSE in October before tumbling after the tax increase. It hit a 52-week low of Rs 275 in June and closed at Rs 281.4 on Thursday.

Puri said that while determining the company's share price is not the management's role, the focus remains on creating long-term value for shareholders, which should eventually be reflected in the stock's performance.

“The huge increase in taxation is a challenge, but we are taking appropriate steps to deal with the situation. This includes calibrated approach in price hike to minimise the losses to illicit cigarettes and re-architect the portfolio through innovation and the launch of multiple new SKUs,” he said.

Tax arbitrage with illicit cigarettes remains a major concern, as repeated tax increases have fuelled the growth of the illegal market, where products evade taxes and are often sold at a fraction of the price of legal cigarettes. Puri said cigarettes are taxed nearly 50 times more than several other tobacco products, and the company is engaging with policymakers to highlight this disparity.

While ITC commands more than 75% of the legal cigarette market, the company has been steadily diversifying into fast-moving consumer goods (FMCG), agri-business and paperboards and packaging to reduce its dependence on cigarettes. Puri said the diversification strategy would enhance shareholder value.

"According to analyst reports, the valuation contribution of ITC's newer businesses has increased from 25% in 2017 to 40% before the recent increase in cigarette taxation. While we are taking steps to emerge stronger in the cigarette business, we will continue to invest in and grow our other businesses, which are expanding at a faster pace," he said.

ITC's FMCG business has grown significantly, with revenue rising from about Rs 10,000 crore in 2017 to around Rs 24,000 crore currently. The company aims to improve the segment's EBITDA margin by 80-100 basis points year-on-year.

"There are certain gestation costs in the FMCG business, which make margins appear lower than the business's true potential. As the newer businesses achieve scale and benefit from operating leverage, margins will continue to improve," Puri said.

The ITC chairman also said the company has not ruled out an initial public offering of its information technology subsidiary, ITC Infotech, but added that such a move would be considered only after the business attains the desired scale.

Puri said ITC has earmarked Rs 20,000 crore for capital expenditure over the next five years and has sufficient internal resources to fund both these investments and any acquisition opportunities that may arise.