Duty hike plan burns a hole in ITC scrip

Written by fe Bureau | Mumbai | Updated: Jun 24 2014, 14:08pm hrs
ITC Proposal of a hike of Rs 3.5 per cigarette would hurt ITC's volume growth: analysts. (Reuters)
Cigarette manufacturers saw a sharp fall in their scrips on Monday amid concerns that a proposed steep hike in excise duty may force them to raise prices even if it meant enduring a weak volume growth.

Analysts tracking FMCG companies said Union health minister Harsh Vardhan's proposal of a hike of Rs 3.5 per cigarette was steep and would hurt ITC's volume growth, which has sharply declined over the previous two quarters.

ITC is known to pass on excise duty hikes to customers. However, the proposed hike of 40-75% is unprecedented. It is unclear if such a hike will be levied. If the proposal is implemented, we will wait to see if ITC partly or fully passes on the hike. The government has increased excise duty by an average 20% in the last 18-24 months, said a Mumbai-based analyst of an international brokerage.

ITC the country's biggest cigarette manufacturer was the biggest loser on Monday, posting a fall of 7% and reporting a four-and-a-half times jump in trading volume. Over 2.44 crore shares were traded on the BSE and the NSE, compared with the five-day average volume of 55.13 lakh shares. The scrip saw heavy selling pressure and eventually ended at Rs 314.95, down 6.2% the biggest percentage drop in more than five years. With the decline in the share price, the FMCG major's market cap fell by R17,377 crore. The market valuation of the company on Monday stood at R2.49 lakh crore against R2.67 lakh crore on Friday.

Hyderabad-based VST Industries also fell 6.2% on the NSE. More than 33,000 shares were traded on both the exchanges, 2.33 times the five-day average volume. Other cigarette manufacturers like Godfrey Phillip (-1.7%), Kothari Products (-1.8%) and Golden Tobacco (-4.2%) witnessed selling pressure. However, ITC's Monday fall was a bit of an over-reaction and the stock may partly recover losses in the next one or two trading sessions, analysts said.

The Street needed a reason to sell. The stock is highly overvalued and there are technical reasons for Monday's selling. Definitely volumes will take a hit, but we need more clarity from a fundamental viewpoint, said another analyst with a domestic brokerage.


Analysts, however, ruled out any possibility of stock downgrades and chose to wait for official confirmation of the proposed measures.

Last week, Harsh Vardhan had urged the finance minister to impose a steep hike of R3.5 per cigarette to discourage cigarette consumption.

Vardhan also asked for removal of tax exemptions provided to the beedi industry, which, together with cigarettes, may encourage over 6 million actual as well as potential smokers to quit smoking. The new tax may also bring about R3,800 crore in revenue.

I propose... a large but feasible tax hike in the 2014 Budget on cigarettes. The tax would be applied to all lengths to prevent the industry (tobacco) from shifting production and marketing to lower length cigarettes, as has been the past practice. The more expensive they become, the better it is for all of us. Their price should be hiked. They should become rare, Vardhan said.