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Test of pricing power
In response to the hikes in taxes on cigarettes, largely led by the states,
ITC has raised cigarette prices by 14% Cagr over the last five years – an
all time high. This has brought down taxes (excise + VAT) as a % of
selling price from 57% in FY08 to 52% now. With possibility of more
state and central government tax increases, ITC’s pricing power will be
tested. However, we remain confident of ITC’s pricing power so long as
we do not see any competitive threats emerging.
c.30% of taxes now state taxes (VAT)
Till FY07, states were not allowed to levy taxes on cigarette. With the change
of legislation, state taxes (VAT and others) are now c.17% of selling prices –
the key reason for the tax/stick to grow by a 13% Cagr over the last five
years. The state VAT now varies from 12.5% - 40% of the sales value across
states and the recent trend indicates that the weighted average VAT may rise
as more states move up the tax rates.
Central taxes (excise) increase has been lower though
Thankfully, the central government excise duty/stick has increased by only
4% Cagr over the last 10 years and 6% Cagr over the last 5 years. With the
central excise duties now only 38% of selling price now as against 55%, five
years ago, the significance of the central government budget has reduced but
risks of ad-hoc increases by states have increased. We also note that despite
sharp price increase, ITC’s prices are broadly in-line with regional averages.
Last 5-year cigarette price Cagr at c.14% - all time high
Over the last five years, ITC’s average cigarette selling price has nearly
doubled to Rs3.6/stick – a Cagr of 13.9%. This is the highest 5-year Cagr
over the last 15 years. The previous peak of the 5-year price Cagr was 12.7%
in FY02, which was followed with nearly five years of extremely mild tax
increases. However, this time around the pace of tax hikes will be high given
the Government’s fiscal situation. The proposed GST implementation might
also increase the state taxes.
Pricing power to the rescue
Thanks to ITC’s aggressive price hikes, total taxes as a % of selling price is
now 52% - as against 57% earlier in FY08. Lack of credible competition has
been the key reason why ITC has been able to undertake liberal price
increases. With the competitive scenario showing no signs of changing
anytime soon, we continue to remain bullish on ITC’s ability to drive a steady
16-18% earnings growth over the next few years driven by its pricing power.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Test of pricing power
In response to the hikes in taxes on cigarettes, largely led by the states,
ITC has raised cigarette prices by 14% Cagr over the last five years – an
all time high. This has brought down taxes (excise + VAT) as a % of
selling price from 57% in FY08 to 52% now. With possibility of more
state and central government tax increases, ITC’s pricing power will be
tested. However, we remain confident of ITC’s pricing power so long as
we do not see any competitive threats emerging.
c.30% of taxes now state taxes (VAT)
Till FY07, states were not allowed to levy taxes on cigarette. With the change
of legislation, state taxes (VAT and others) are now c.17% of selling prices –
the key reason for the tax/stick to grow by a 13% Cagr over the last five
years. The state VAT now varies from 12.5% - 40% of the sales value across
states and the recent trend indicates that the weighted average VAT may rise
as more states move up the tax rates.
Central taxes (excise) increase has been lower though
Thankfully, the central government excise duty/stick has increased by only
4% Cagr over the last 10 years and 6% Cagr over the last 5 years. With the
central excise duties now only 38% of selling price now as against 55%, five
years ago, the significance of the central government budget has reduced but
risks of ad-hoc increases by states have increased. We also note that despite
sharp price increase, ITC’s prices are broadly in-line with regional averages.
Last 5-year cigarette price Cagr at c.14% - all time high
Over the last five years, ITC’s average cigarette selling price has nearly
doubled to Rs3.6/stick – a Cagr of 13.9%. This is the highest 5-year Cagr
over the last 15 years. The previous peak of the 5-year price Cagr was 12.7%
in FY02, which was followed with nearly five years of extremely mild tax
increases. However, this time around the pace of tax hikes will be high given
the Government’s fiscal situation. The proposed GST implementation might
also increase the state taxes.
Pricing power to the rescue
Thanks to ITC’s aggressive price hikes, total taxes as a % of selling price is
now 52% - as against 57% earlier in FY08. Lack of credible competition has
been the key reason why ITC has been able to undertake liberal price
increases. With the competitive scenario showing no signs of changing
anytime soon, we continue to remain bullish on ITC’s ability to drive a steady
16-18% earnings growth over the next few years driven by its pricing power.
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