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Uttar Pradesh govt raises VAT on cigarettes to 50%
July, 04th 2012

ITC shares tumbled over 4% in late trading on Monday after the Uttar Pradesh government raised value added tax (VAT) on cigarettes to 50%, stoking fears yet again that this move, which comes on the back of similar moves in some other states, could hurt volumes at India's largest cigarettes maker.

ITC has already hiked prices by weighted average of 12% since the Union Budget was announced in March. Excise duty on cigarettes were hiked by 20% in the Budget. Apart from UP, which has now hiked VAT on cigarettes to 50% from existing 12.5%, other states like Karnataka and Kerala too have raised their taxes on cigarettes.

While ITC mostly always passed on the additional duty hike on to consumers, some analysts are concerned that such frequent price hikes could put pressure on its volumes.

"We believe suggestions of inelasticity of demand are overstated and see risk to FY13 volumes following sharp price increases. We believe FY13 volumes could decline by more than 5% as ITC decides to push through price increases to offset the increase in duties. Visibility on FY13 is opaque until we see the impact on volumes following these levels of price increases," Nitin Mathur, analyst at Portugese investment bank Espirito Santo, had said last month.
The cigarettes business contributes to nearly half of ITC's total revenue. Last year, the company reported gross revenue of Rs 36,617.5 crore. Gross  cigarettes revenue was Rs 23,232 crore.

Espirito Santo has advised investors should "sell" ITC shares. It has a fair value of Rs 200 on the stock.
Others like Abneesh Roy of Edelweiss Securities too expect a flatish growth in cigarette volumes this year.
ITC has been testing a 64mm cigarette due to the 40% tax differential between 64mm and 69mm  cigarettes. ITC's rivals like VST Industries are also testing this 64mm category.

ITC shares fell to a low of Rs 247.45 before closing down 3.4% at Rs 250.05 on NSE on Monday.  The stock had hit a 52-week high of Rs 260.40 earlier in the day.

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