Budget Reactions: Excise hike to hit ITC earnings, StanChart sees 1.5% dip

Sanjay Singh, associate director at Standard Chartered Securities India Ltd, tells CNBC-TV18 that ITC could see earning fall by 1.5% in the coming year due to the 18% hike in excise duty.

Singh points out that this is the second such blow to ITC, which has also has to face increases in the value added tax of different states. “If you take VAT increases plus the 18 percent excise increase, it would mean that ITC needs to increase prices by almost more than 20 to 25 percent to ensure a double digit kind of earnings growth,” he said. Coupled with the overall corporate tax, Singh says that ITC could see earnings per share (EPS) decline by 1.5% in the coming year. Furthermore, due to poor economic conditions, Singh believes that the consumer’s ability to absorb prices hikes will be lower which will lead to a fall in volumes. Below is an edited transcript of his interview. Also watch the accompanying video. Q: What did you make of the excise slap on ITC this time and how do you think the market shrugged it off? A: The excise duty is definitely a very hefty hike. An 18 percent hike over and above the last year’s 20 percent is not something which we can completely ignore. Anything around 10 percent would have been positive, so this is marginally negative. Over and above that, what you need to understand is this year the Value Added Tax (VAT) increases by many states will be quite hefty. We have already seen Bihar increasing from 20 percent to 30 percent and Gujarat from 25 percent to 30 percent. So as the goods and services tax (GST) approaches many states would try to increase VAT rates. But I would like to remind you that most Southern states, which are the key contributors, are less than or at 20 percent. So VAT increases this year could be quite high. If you take VAT increases plus the 18 percent excise increase, it would mean that ITC needs to increase prices by almost more than 20 to 25 percent to ensure a double digit kind of earnings growth. So volumes can fall quite a bit because the economy is weak and consumer’s ability to take price increases will be little lower, especially because last couple of years hikes were quite significant. When you couple this with the overall corporate tax increase of 1.5 percent, that shaves away 1.5 percent of earnings per share (EPS) from ITC. So net-net I think the ability to do a 20 percent EPS growth is very less this year. It will be more towards 15 percent, but in this environment even a 15 percent EPS growth everybody would latch onto because the market overall is very weak. So even though is not a positive event for ITC, from a portfolio perspective it probably would still make sense. So, the way we would see it is largely neutral in nature, but an overall absolute return from here in the near-term, next 3-6 months wouldn’t be easy to come by. Q: Will you take a relook at Hindustan Unilever’s EPS forecast because of the higher tax on royalty? A: No actually not. HUL royalty remains the same because we just spoke to the company and their taxation treaty is pre-2005 and they were anyway paying a 15 percent tax on royalty. So bottom-line is HUL’s royalty doesn’t go up. What ofcourse goes up is the effective corporate tax rate, which is for everybody. So, no royalty impact on HUL.