Stock Reivew: ITC

When the markets were abuzz with the likelihood of a 20-30 per cent hike in excise duty on cigarettes last week, ITC shares came under pressure. The stock fell even as other defensives were up on a "manic Monday".

While the quantum of increase in taxes remains unclear, ITC has started undertaking price hikes, claimed analysts. Retailers, for instance, are charging 20 per cent more for the Classic range since last week.

Incidentally, the government did not hike excise rates on cigarettes in FY12, as was widely expected by the market. Analysts claimed their channel checks suggested that the price increases could be imminent in three brands, Wills Navy Cut, Gold Flake and Gold Flake Premium. The company said it does not comment on pricing action. JP Morgan Asia Pacific Equity Research said: "In order to neutralise the impact of such excise hikes (if implemented), ITC would need to implement at least 1015 per cent price hike across its cigarette portfolio." ITC is known to beat any hike in taxes by passing it on to the consumer with price revisions in advance. Before the finance minister presented his budget for FY12, the company had taken similar measures. By pre-empting a rise in taxes, the company has retained its operating margins. Analysts were expecting pricing to remain strong with Tamil Nadu increasing VAT and some others expected to toe the same line.

Sharp price increases in the past did affect the cigarette industry's volume growth, but it has shown commendable resilience in recent years given its habit forming nature and enhanced affordability. However, in years of aggressive tax hikes (FY08, FY09 and FY11) cigarette EBIT growth was 15-17 per cent. For instance, in FY08 when cigarette prices were raised 24 per cent, volumes declined one per cent and in FY11, when the price was hiked by 18-20 per cent, volumes declined 2.8 per cent. ITC's revenue from cigarettes grew by 15.7 per cent to `2,873.6 crore in Q1 of FY12, from `2,483.6 crore in Q1FY11 and by 3.1 per cent from `2,787.3 crore in Q4FY11. Despite severe taxation and regulatory environment for cigarettes, the EBIT margin in Q1FY12 was 54.9 per cent, compared to 52.5 per cent in Q1FY11 — a rise of 240 basis points. Sequentially, the company's margins registered a growth of 210 basis points. Despite price hikes, concerns of severe taxation and regulatory milieu still remain for the industry, said analysts.