ITC: VAT woes

STOCK IN THE NEWS

Cigarette major ITC lost 3.4 per cent on Friday closing at Rs 144.20 after the Maharashtra government decided to levy 12.5 per cent value-added tax (VAT) on cigarettes. It was the biggest loser among the 30-Sensex constituents. The stock gained earlier during the week from a weekly low of Rs 140.15 to Rs 149.90. The ITC stock was battered in the last few days due to concerns that the government might bring cigarettes under the VAT net.

From Rs 172.50 on March 1, ITC tumbled to Rs 140.15 by March 20. The Taxation Laws (Amendment) Bill of 2007 passed by the Lok Sabha on Monday (March 19) paves the way for states to levy more than 4 per cent VAT on cigarettes.

The profit margins of ITC, the country's biggest cigarette maker, will be eroded by the proposed levy on tobacco by the 28 states. Chairman Y C Deveshwar said, "We have started creating multiple lines of businesses some time ago. That work is in progress.'' The VAT might erode the company's earnings, said analysts at Citigroup. "If the average VAT rate of 12.5 per cent is passed on by ITC, near-term volumes would not grow, putting our FY08 earnings per share at a 14 per cent to 15 per cent downside risk,'' Deveshwar said.