Budget News: Excise duty hike unlikely to hurt cigarette cos

Finance Minister Pranab Mukherjee in his Budget for 2012-13 on Friday proposed a hike in basic excise duty on cigarettes of more than 65mm length by 10%. It will be charged on an ad valorem basis on 50% of the retail price.

However, shares of cigarette maker ITC surged to a 52-week high of Rs 225 on NSE. It finally closed up 3.5%. ITC's rival Godfrey Phillips also closed up 3%, while VST Industries jumped more than 9%.

The shares rose as the higher excise was on fewer cigarette variants than expected and there is also a hope that increase in excise on chewing tobacco and beedis will tempt users to shift to lower-priced filtered cigarettes.

More over, analysts say cigarette companies have pricing power. ITC, for instance, took calibrated price hikes in Oct-Dec, which helped profit rise 22%. Some analysts say volumes may take a hit in the short-term, but long-term growth remains intact.

"With strong pricing power ITC can pass on the excise duty hike through further price hikes in its cigarette portfolio," said Sharekhan's Kaustubh Pawaskar.

Further, he feels ITC could also launch filter cigarettes below the 65mm category, as the hike is on cigarettes over 65mm.

In a report released prior to the Budget, IDFC's Nikhil Vora had said the brokerage is confident that ITC's "unmatched" pricing power will enable EBIT growth of over 15% irrespective of the Budget outcome.

Vora also feels ITC has a far more premium portfolio and consumers at these price points are more willing to absorb price hikes.

ICICI Direct.Com in turn feels a rise in excise duty of other tobacco products could lead to a shift in consumption to cigarettes and hence would be positive for cigarette companies.

So all in all, like Angel Broking says, the excise duty hike will be neutral for ITC and other cigarette makers.

Nachiket Kelkar
nachiket.kelkar@moneycontrol.com