ITC's move to undertake calibrated price hikes through the entire fiscal would provide them with the much-needed hedge against the present excise duty hikes on cigarettes. The Finance Minister has imposed a new ad-valorem charge of 10 per cent on half the price of a pack of cigarettes. The additional 20-35 paisa charge per cigarette works out to roughly five per cent per stick and is unlikely to hurt ITC's margins. The company has undertaken a series of price hikes of between 10-15 per cent on its various brands over the last few months.

Excise charges currently account for 80 paisa to Rs 1.6 per cigarette sold. Another encouraging development for ITC is the increased excise charges on chewing tobacco and beedis. The hope is a possible hike in the prices of these products could spark users to switch to lower-priced filtered cigarette products. The biggest beneficiary of such a consumption shift would be VST Industries which produces smaller filter cigarettes. The company soared by 9.2 per cent on the bourses following the Budget.

Threats to ITC's margins at this point include increases in the VAT imposed by states. Such an increase would require another round of price hikes by the company in order to preserve margins. For now, markets seem enthused about the company's prospects. ITC's shares ended the day 3.7 per cent higher. Smaller competitor Godfrey Phillips finished 3.9 per cent higher.

>adarsh@thehindu.co.in

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