Tobacco giant's value push is running out of puff

Indian Hotels

10/01/2025 12:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
    By Ujjaini  Dutta
       BENGALURU, Jan 10 (Reuters Breakingviews) - Smoking is
about to look even less attractive. Shares of India’s ITC
 ITC.NS , the $65 billion conglomerate backed by British
American Tobacco  BATS.L , have barely moved since the company
announced plans in July 2023 to spin off hotels despite a rally
in the emerging market's equities. Now ITC faces the prospect of
higher taxes on its core cigarettes business. For boss Sanjiv
Puri, the challenges of unlocking value will mount as growth in
the economy slows.
    His decision to list the hospitality business, which
generates about 4% of the group’s revenue, makes sense. Despite
the slowdown in consumption, the Indian premium tourism market
is growing exponentially. ITC Hotels, whose shares are due to
start trading in February, is a luxury specialist with some 140
properties from New Delhi to Colombo. 
    Indian Hotels  IHTL.NS , part of the Tata Group and a direct
competitor, trades at 58 times forward earnings. That's more
than twice the multiple of ITC, which will share any success
because it retains a 40% stake in the unit. In the meantime,
separating from its parent will make it easier for the
capital-intensive hotel chain to attract investors because many
institutional funds shun tobacco stocks.
    The fact ITC shares are stuck, however, reflects a threat
rather than an opportunity. Last month, a group of ministers
mulling a rationalisation of a goods and services tax proposed
adding a fifth, higher, slab of 35% for tobacco products as well
as aerated beverages, news agency PTI reported, citing an
official. The current rate for cigarettes, which generate nearly
half of ITC sales, is 28%.
    Sin products are an obvious target for officials who want to
boost government revenue: ITC's cigarette sales have barely
recovered to the level they were at prior to the initial
implementation of a nationwide GST in 2017. Companies expected
the sheer number of tax slabs to reduce over time, not increase.
Worse, Indians are lighting up again in the black market because
cigarettes there aren't subject to tax. Those products were
harder to come by during the pandemic but supply is easing
again. 
    Puri, in his capacity as president of the influential
Confederation of Indian Industry, is calling for lower taxes and
a simpler three-tier GST structure to boost consumption. That
would help restore some puff to both ITC and the economy. 
    
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    CONTEXT NEWS
    Shares of ITC Hotels, a unit spun off from Indian
tobacco-led conglomerate ITC, are expected to start trading in
February.
    In December, a group of ministers on the country’s Goods and
Services Tax council proposed hiking the tax on sin goods like
cigarettes, aerated beverages and tobacco products to 35%, from
the current 28%, news agency PTI reported, citing an official.

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Graphic: ITC's shares are stuck despite its hotels spinoff    https://reut.rs/4a9ISQY
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 (Editing by Una Galani and Aditya Srivastav)
 ((For previous columns by the author, Reuters customers can
click on  DUTTA/ 
ujjaini.dutta@thomsonreuters.com))