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The Union Budget has levied an additional 10% ad valorem excise on 50%
of MRP for cigarettes, over and above the fixed rate structure. This raises
the risk of 100% ad valorem in the coming years which is structurally
negative for the company. Our channel checks and calculation indicate a
14%‐15% excise hike in FY13. In order to offset this, ITC needs to take ~9%
price hike (of which 1.5% already taken). We expect this would slow down
its volume growth to ~2% in FY13E (6% plus in FY12). Also excise hike on
foods from 1% to 2% is negative. Positives include 20% increase in taxes
on biri which will lead to higher uptrading to cigarettes and the likely
entry of ITC in sub‐65mm cigarettes. Maintain BUY on high pricing power.
Ad valorem‐ Govt to gulp in a share of price hike
Ad valorem duty implies that a part of the price increase now needs to be shared with
the government. This indicates a reduced ability to increase margins and higher focus
on volume growth. However, this would not be easy due to the existence of significant
illegal cigarettes in the segment.
Table 1: We reckon excise hike of 14‐15% above street’s estimate of 10‐12%
Source: Edelweiss research, company
Outlook and valuations: Long term positive; maintain ‘BUY’
Although the tax hike is marginally higher than our expectations, high pricing power
and improving profitability in consumer business remain key positive. We maintain
‘BUY’/ ‘Sector Outperformer’.
FY12E
Average Realization per stick 2.62
VAT @17% 0.81
Avg MRP per stick 3.43
Additional excise (Ad valorem of 10% on 50% of MRP) 0.17
Excise before budget @44% of avg realization per stick 1.15
Excise growth (%) 14.87
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The Union Budget has levied an additional 10% ad valorem excise on 50%
of MRP for cigarettes, over and above the fixed rate structure. This raises
the risk of 100% ad valorem in the coming years which is structurally
negative for the company. Our channel checks and calculation indicate a
14%‐15% excise hike in FY13. In order to offset this, ITC needs to take ~9%
price hike (of which 1.5% already taken). We expect this would slow down
its volume growth to ~2% in FY13E (6% plus in FY12). Also excise hike on
foods from 1% to 2% is negative. Positives include 20% increase in taxes
on biri which will lead to higher uptrading to cigarettes and the likely
entry of ITC in sub‐65mm cigarettes. Maintain BUY on high pricing power.
Ad valorem‐ Govt to gulp in a share of price hike
Ad valorem duty implies that a part of the price increase now needs to be shared with
the government. This indicates a reduced ability to increase margins and higher focus
on volume growth. However, this would not be easy due to the existence of significant
illegal cigarettes in the segment.
Table 1: We reckon excise hike of 14‐15% above street’s estimate of 10‐12%
Source: Edelweiss research, company
Outlook and valuations: Long term positive; maintain ‘BUY’
Although the tax hike is marginally higher than our expectations, high pricing power
and improving profitability in consumer business remain key positive. We maintain
‘BUY’/ ‘Sector Outperformer’.
FY12E
Average Realization per stick 2.62
VAT @17% 0.81
Avg MRP per stick 3.43
Additional excise (Ad valorem of 10% on 50% of MRP) 0.17
Excise before budget @44% of avg realization per stick 1.15
Excise growth (%) 14.87
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