The Uttar Pradesh Government recently increased state VAT applicable for cigarettes to 50% from 17.5%. The implication of this is likely to impact ITC's performance as UP accounts for around 5% of ITC's cigarette sales in value terms. The Street has varying view on the effect of this on the company's stock price. According to Manoj Menon of Kotak Securities, if the company absorbs this incremental tax, it will impact the company's FY13 EPS by 2%.
The report highlights that in FY2007-08, UP had levied a 33% trade tax on cigarettes when most other states had moved to 12.5% VAT (which was reversed within a few months). According to channel sources, trade channels took advantage of the differential tax in UP thereby limiting the impact on the industry. While the firm's view on ITC's stock remains positive, it sees the strong performance of the stock in the near term as limiting the upside in the stock.
Another equity research firm Espirito Santo Securities has recommended a sell on ITC. According to the firm's latest report on the stock, the risk of tax increases on tobacco has heightened and more states may see tobacco taxation as an easy option. ITC is heavily exposed to several of the states with the greatest fiscal vulnerability.
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