itc share price: Is it time to reduce exposure to sin stocks in your portfolio?

MUMBAI: Liquor and cigarette makers were among the first picks for investors when it came to benefitting from the reopening of the economy. The tactical trade reaped dividends, with shares of these companies rising 10-50 per cent over the past three months. However, risks for the sin goods sectors — especially government action — are increasing sharply.

For liquor companies, the fundamental business environment is strong as clubs, restaurants and bars are opening up with ease after the easing of Covid restrictions. Further, the rapid acceleration in travel and tourism over the past couple of months has also bred optimism among investors. That said, analysts fear the risk of higher taxes on liquor has increased sharply over the past week after various state governments have reduced ad-valorem tax on retail fuel to match the Centre’s move to cut excise duty on petrol and diesel.

As many as 22 states have cut value-added tax on retail fuel to ease the burden on consumers’ wallets. However, fuel and liquor taxes are the two biggest sources of revenue for state governments. With one reduced, the other more often than not is squeezed to bridge the gap. “Due to this cut, states would need to make up the shortfall elsewhere and, hence, an overhang on liquor taxes,” said Avneesh Roy of Edelweiss Securities in a note.

Investors should go underweight on cigarette stocks because of the extremely high risk that taxes on tobacco products would be raised in the upcoming Budget, he said. The Center has dithered from raising taxes over the past two years. But with the formation of a new panel to look into cigarette taxes in partnership with the WHO, the risk of greater tax on smoking was high. “We see a 100 per cent probability of an increase in Cig Taxes on the Feb 1 budget. Quantum remains to be seen but we expect a 10 per cent increase, especially given the latest tax cuts in petrol,” Roy added.

Shares of cigarette companies are already under pressure since the announcement of the panel on cigarette taxes. For

, which had only recently started participating in the ongoing bull market, higher taxes are bad news as it could lead to a loss in volumes as well as market share to illegal cigarettes.

The one sector analysts are optimistic about is the multiplex space. The box office response to
Sooryavanshi over the Diwali weekend has fuelled hope that the sector could finally see sustainable recovery.

Cinema owners have been one of the biggest losers in the pandemic as the Covid restriction shut down many small theatres. Analysts said PVR and Inox Leisure had a chance to capture market share from weaker players as several big Bollywood movies were due to hit the screens in winter.