Cigarette maker ITC Ltd’s shares rose by 4.3% on Tuesday, compared with a 6% drop in the previous trading session, when the Budget was announced. A higher excise levy on cigarettes was the main reason for the fall, but the Budget’s proposals were not as bad as perceived. Also, the move to give investment-based tax benefit to hotels and lower personal income tax would benefit the firm.
But the cynosure of attention was the cigarette business. The bad news was that the Budget had hiked excise duties on cigarettes of specified lengths. Cigarettes of lengths 60-70mm and 70-75mm saw hikes of 15 paise per stick, or 18% and 11%, respectively. More expensive cigarettes in the 75-85mm range saw a hike of 20 paise per stick, or 11%. In absolute terms, the percentage hike was not as significant as it appears in relative terms. After adding state levies and other taxes, the net increase may still work out to be higher.
But the Budget also carved out a new category, of filter cigarettes up to 60mm length. It reduced duties on both filter and non-filter cigarettes in this category, rolling back a steep hike in duties in the 2008-09 budget. According to ITC, the effect of this hike was to create a market for illegally produced cigarettes on which no duty was paid. The firm’s demand for a new category was met, which will make this segment viable again. This should increase sales, as it is a high volume category.
Graphic: Yogesh Kumar/Mint
The hike in duties will not affect ITC in the longer run. The economy is expected to grow even higher in the next few years. Underlying demand for cigarettes will be strong and is unlikely to be affected by price hikes. Moreover, the Budget also increased duties on all kinds of tobacco, including chewing tobacco. That also meets ITC’s concern of a level playing field between various forms of tobacco.
ITC’s hotel business got a boost, as the Budget has allowed hotels that start functioning after 1 April an investment-based incentive. A deduction of 100% of the investment in constructing a hotel can be availed, which will boost profitability. The overall outlook for the firm, thus, is not as bad as it first appeared when the Budget was announced.
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