Why ITC stock is up despite higher duties on tobacco products

Defying a hike in excise duty on tobacco products, the ITC stock on Tuesday opened Rs 9 higher than its Monday closing price on the Bombay Stock Exchange. In fact after a sharp dip of 5-6% soon after the announcement of an increase in excise duty on most tobacco products in the Union Budget for 2016-17, it had recovered and closed in the green yesterday.

Finance Minister Arun Jaitley on Monday announced a 10% increase in excise duty on cigarettes, but analysts had already factored in an 8-10% increase anyway.

According to the Tobacco Institute of India, since 2012-13, the incidence of excise duty on cigarettes, at a per unit level, has gone up cumulatively by 98%. The 10% increase announced in this year's budget will take up the cumulative duty impact since 2012-13 to 118%.

However, this is lower than the 13% hike in FY16 and 21% hike in FY15. According to Abneesh Roy of Edelweiss Securities, the government has stuck to its ideological stance on cigarettes though the hike has been progressively on the decline despite facts suggesting the Budget should have been moderate.

ITC is expected to take cigarette price hikes of 7-8% in select brands which could put pressure on its EPS growth.

However, ITC has increasingly diversified its product portfolio to the point where close to 50% of its revenues come from its non-cigarettes business. The rural push of the government could help grow its non-cigarettes FMCG business. This part of the Budget found mention in ITC Chairman Y C Deveshwar's budget comments as well. "The thrust given to the agriculture, rural and social sectors is particularly commendable and will serve to be very effective catalysts to drive an era of stable and sustainable growth," he said after the Budget was presented.

ITC Limited