ITC: 'Predictability-thesis' at play :: Kotak Securities PDF link

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‘Predictability-thesis’ at play. We reiterate that ITC is going through a phase of
predictable and rational taxation, which augurs well for medium-term volume growth
(and hence higher quality of profit growth). We highlight the Government’s policy of
increasing taxes on bidis and chewing tobacco at a rate higher than cigarettes. After a
manageable 15% excise hike in the Union Budget, eight states left VAT on cigarettes
unchanged in their budgets. These states contribute ~55% to ITC’s sales. HP, Kerala
and Karnataka increased VAT by ~2%. Our positive view stays, ADD.
State budgets give ITC a breather
Pursuant to the 15% excise hike through the ad valorem route in the Union Budget 2012-13, 11
states presented their budgets. We summarize the changes with respect to cigarette taxation:
` Eight states left VAT on cigarettes unchanged: Andhra Pradesh, Gujarat, Haryana, Madhya
Pradesh, Maharashtra, Rajasthan, Tamil Nadu and West Bengal. They contribute ~55% to ITC’s
sales, in our view.
` Three states increased VAT on cigarettes: Himachal Pradesh to 18% from 16%, Kerala to 15%
from 12.5% and Karnataka to 17% from 15%. These states contribute ~23% to ITC’s sales, in
our view. Himachal Pradesh contributes ~2% to ITC’s sales, Karnataka ~9% and Kerala ~12%.
` The effective VAT rate for ITC is currently ~18%. No change in VAT in eight states is a
significant positive.
` In addition to increased VAT on cigarettes, three states imposed/increased VAT on bidis.
Maharashtra levied 12.5% tax, Andhra Pradesh levied 5% tax and Himachal Pradesh increased
VAT to 11% from 9.75%.
` The demonstrated intention by the Government to increase tax on bidis and chewing tobacco
probably indicates rational taxation of cigarettes. Excise on bidis was increased by 25% (the rate
is lower, though: Rs10/1,000 bidis from Rs8). The excise hike on bidis came after four years.
Excise on chewing tobacco was effectively doubled. Chewing tobacco has been taxed heavily
anyway since 2011 as a ‘compounding levy’, that is, the tax is based on capacity.
` Moreover, we highlight that implementation of GST would mean bidis and chewing tobacco
could come under the ambit of state VAT (as these products are sold mainly through wholesale
traders).
` We reiterate our view, highlighted in our note dated December 27, 2011 “Signs of ‘predictable
taxation regime’, probably”, that considering the addictive nature of cigarettes and associated
consumer behavior, predictability in taxation (and hence calibrated price increases) is the key for
industry volumes.