ITC : VAT a blow!
The Maharashtra government’s decision to impose a value- added tax of 20 per cent on cigarettes has come as a bit of a blow for ITC which closed 4 per cent lower on Monday at Rs 184. The fairly sharp rise of nearly 8 per cent may prompt ITC to increase prices in a bid to neutralise the effect of the higher tax.
However, what’s worrying is that other states could follow suit, especially bigger states such as West Bengal and Kerala, whose budgets are due later this month. The Street is also apprehensive that excise duties on cigarettes may be hiked in the coming budget and once again, if ITC needs to raise prices, volumes could be hit.
Analysts believe that an excise duty hike of more than 5 per cent would be detrimental to volumes in the long run. ITC discontinued selling non-filter cigarettes following the sharp increase in duties in the last budget which was partly why volumes came off by 2.5-3 per cent in 2008-09.
Although the company has been diversifying into new areas, cigarettes account for around 40 per cent of sales while they fetch around 85 per cent of the profit before interest and tax. The ITC stock has underperformed the BSE Sensex by about 40 per cent since the start of the year. That’s not so surprising because investors have been discarding defensives in their search for growth and value especially post the election results.
In fact, since early March when the markets started rallying, fund managers have been looking for value stocks. ITC’s earnings were expected to grow by about 17-18 per cent in the current year but those numbers may not materialise, say analysts.
Meanwhile, the difficult and uncertain regulatory environment will keep the ITC stock subdued in the near term.