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ITC shares under pressure after Karnataka hikes VAT on tobacco
March, 22nd 2012

Shares of cigarette major ITC underperformed the broader markets and the FMCG index on the Bombay Stock Exchange Wednesday on concerns about higher taxes in states. ITC faces risk of more taxes imposed by state governments over next two months.

Brokerage firm Barclays said more tax changes are expected when states announce their budgets. This is precisely what happened in Karnataka today. The state government has proposed a hike in VAT on tobacco products from 15% to 17% in the Budget today. Karnataka contributes 9% to the volume of ITC's business.

Though excise duty was hiked in the Union Budget presented last week, most brokerages had maintained favourable calls on the stock reasoning that the company had the pricing power to pass on the hike.

"Excise duty structure becomes hybrid with effective hike at ~15%. The hybrid system raises the proportion of variable taxes. Remain confident of ITCs pricing power, no downside to estimates," brokerage firm CLSA had said in its report on the company.

However, with more and more states hiking duty on tobacco, the FMCG giant may under some pressure.

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