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Following the recent hikes in VAT rates by states like West Bengal and Tamil Nadu to 20%,
Andhra Pradesh has also raised VAT from 14.5% to 20%. AP is an important state for ITC
with around 8-9% of revenues, and hence ITC needs to raise prices by 0.5% to neutralise
impact.
The new VAT tax rate heading towards 20%, with one more hike
The state of Andhra Pradesh has raised VAT on cigarettes to 20% from 14.5%.
Andhra Pradesh accounts for around 8-9% of ITC's revenues, hence the above hike will
need a 0.5% increase in weighted average cigarette prices to neutralise.
We believe the weighted average VAT rate for ITC has crossed 17% with the recent hike.
Recent VAT increases are a growing cause for concern
In 2011, we are witnessing a gradual move up in the VAT rates in most states which is
clearly a cause for concern, as VAT is currently charged on maximum retail price (MRP),
and hence has a cascading impact on ITC's tax incidence.
Before West Bengal (13.5%-20%), the states of Tamil Nadu (12.5-20%), Assam (12.5%-
20%), Gujarat (12.5-25%), and Rajasthan (12.5%-40%) had increased VAT on cigarettes
and tobacco products.
The Good & Service Tax (GST) implementation we believe will ensure that there would be
uniform levy on state taxes, however we believe the timing of the implementation is uncertain,
as there is no consensus among many states on various issues.
However, the only positive aspect has been the growing attempt to create awareness of the
ill-effects of other formats of tobacco like banning of "sachet" packaging, and media publicity
of ill-effects of chewing tobacco on health. This can, over time, shift the dual users of
cigarettes and these formats of tobacco to cigarettes.
ITC's earnings drivers intact, Buy maintained
We expect ITC to take calibrated price increase to counter the recent 2 VAT hikes from the
states of West Bengal and Andhra Pradesh. It has raised prices of "Classic" brands recently,
to neutralise the VAT hikes in the state of Tamil Nadu.
ITC recorded a volume growth of 8% in 1QFY12. However, for the full year we expect ITC to
record a 6-7% volume growth. This volume recovery has to be viewed in the context of the
2.8% volume decline which ITC recorded in FY11 due to sharp price hikes induced by 17%
excise duty hikes. In FY12, the volume recovery gathered momentum in 2HFY11, and hence
we are expecting some softness in volume growth in the later quarters of FY12.
ITC's other FMCG business could be the next value driver as the business is reaching critical
scale in many segments. Overall it would have a revenue of Rs53bn in FY12F, and continues
to deliver growth of 19-20%. We expect the business break-even in FY13, and turn profitable
beyond that.
We have an EPS growth estimate of 19% in FY12. While the lower base of 1QFY11 has
driven a higher PAT growth of 24.5% in 1QFY12. We maintain our Buy recommendation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Following the recent hikes in VAT rates by states like West Bengal and Tamil Nadu to 20%,
Andhra Pradesh has also raised VAT from 14.5% to 20%. AP is an important state for ITC
with around 8-9% of revenues, and hence ITC needs to raise prices by 0.5% to neutralise
impact.
The new VAT tax rate heading towards 20%, with one more hike
The state of Andhra Pradesh has raised VAT on cigarettes to 20% from 14.5%.
Andhra Pradesh accounts for around 8-9% of ITC's revenues, hence the above hike will
need a 0.5% increase in weighted average cigarette prices to neutralise.
We believe the weighted average VAT rate for ITC has crossed 17% with the recent hike.
Recent VAT increases are a growing cause for concern
In 2011, we are witnessing a gradual move up in the VAT rates in most states which is
clearly a cause for concern, as VAT is currently charged on maximum retail price (MRP),
and hence has a cascading impact on ITC's tax incidence.
Before West Bengal (13.5%-20%), the states of Tamil Nadu (12.5-20%), Assam (12.5%-
20%), Gujarat (12.5-25%), and Rajasthan (12.5%-40%) had increased VAT on cigarettes
and tobacco products.
The Good & Service Tax (GST) implementation we believe will ensure that there would be
uniform levy on state taxes, however we believe the timing of the implementation is uncertain,
as there is no consensus among many states on various issues.
However, the only positive aspect has been the growing attempt to create awareness of the
ill-effects of other formats of tobacco like banning of "sachet" packaging, and media publicity
of ill-effects of chewing tobacco on health. This can, over time, shift the dual users of
cigarettes and these formats of tobacco to cigarettes.
ITC's earnings drivers intact, Buy maintained
We expect ITC to take calibrated price increase to counter the recent 2 VAT hikes from the
states of West Bengal and Andhra Pradesh. It has raised prices of "Classic" brands recently,
to neutralise the VAT hikes in the state of Tamil Nadu.
ITC recorded a volume growth of 8% in 1QFY12. However, for the full year we expect ITC to
record a 6-7% volume growth. This volume recovery has to be viewed in the context of the
2.8% volume decline which ITC recorded in FY11 due to sharp price hikes induced by 17%
excise duty hikes. In FY12, the volume recovery gathered momentum in 2HFY11, and hence
we are expecting some softness in volume growth in the later quarters of FY12.
ITC's other FMCG business could be the next value driver as the business is reaching critical
scale in many segments. Overall it would have a revenue of Rs53bn in FY12F, and continues
to deliver growth of 19-20%. We expect the business break-even in FY13, and turn profitable
beyond that.
We have an EPS growth estimate of 19% in FY12. While the lower base of 1QFY11 has
driven a higher PAT growth of 24.5% in 1QFY12. We maintain our Buy recommendation.
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