Tobacco Companies Drag Down Indian Stocks on Proposed Sin Levy

  • Cigarette makers’ tax rate may rise 14% if demerit rate levied
  • Consensus firming for December Fed hike after payrolls data

India’s benchmark stock index fell to a three-week low as cigarette makers declined on concern they will be taxed higher than the proposed national sales tax.

ITC Ltd., the largest tobacco company with the fourth-highest weighting on the S&P BSE Sensex index, was the biggest decliner on the 30-stock gauge. Rival Godfrey Phillips India Ltd. capped its steepest two-day decline since February, while VST Industries Ltd., which makes the Charminar brand of cigarettes, tumbled the most since August. Coal India Ltd., the world’s largest producer of the fuel, retreated to a one-month low.

The S&P BSE Sensex decreased 0.4 percent to 25,530.11, the lowest close since Nov. 18. A government panel after markets hours Friday proposed an unified sales tax in the 16.9 to 18.9 percent range, a level that may help Prime Minister Narendra Modi win over opponents and push through one of India’s biggest economic reforms since the early 1990s. The panel recommended a “sin, demerit rate” of about 40 percent on luxury cars and tobacco products.

“Tobacco companies are leading the decline as there is fear that they will be charged higher than the proposed goods-and-services tax rate,” Shishir Bajpai, a director at IIFL Wealth Management Ltd., which has $12 billion under management and advisory, said by phone. “The market is awaiting the fate of the GST bill, and the Fed’s rate liftoff.”

Cigarette makers’ tax rate may increase as much as 14 percent if demerit rate is levied in addition to central excise tax, Morgan Stanley said in an investor note today.

Fund Outflows

Economic data in the U.S. has raised hopes of a rate increase by the Fed this month. A report on Friday showed a 211,000 increase in November U.S. payrolls, following a 298,000 gain a month earlier that was bigger than previously estimated. The jobless rate held at 5 percent, a more than seven-year low.

A healthy rate of hiring has raised the odds that Fed officials will boost rates this month for the first time since 2006 to 76 percent, denting the allure of riskier assets. Foreign investors sold a net $269.9 million of Indian stocks on Dec. 4, paring this year’s inflows to $2.9 billion. They withdrew $1.1 billion from local equities in November.

ITC plunged 6.7 percent, the most since Feb. 28. Godfrey Phillips decreased 5 percent after slumping 4 percent on Friday. VST Industries slid 2.8 percent. Coal India fell 2.3 percent. Oil & Natural Gas Corp. slipped 1.5 percent in a third day of decline.

The Sensex has fallen 7.2 percent this year and trades at 15.1 times projected 12-month earnings. The MSCI Emerging Markets Index is valued at a multiple of 11.2.

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