Budget 2014: Why ITC’s stock gained despite the increase in excise duty on cigarettes

Like every year, the Union budget proposed an increase in excise duty on cigarettes. The increase has been proposed in the range of 11-72%. This is higher than the 18-20% duty increase effectuated in the last two years. Despite this, the stock of ITC, which has market leadership in the cigarette industry, gained.

This is because the Street had factored an excise duty increase of up to 100% on cigarettes. And the actual increase came much lower than expected – leading to a relief rally in the stock. The company’s stock is up over a percent following the budget.

Analysts have always held that increase in excise duty on cigarettes has limited implications on ITC as the company enjoys strong pricing power and is able to pass on the tax burden to its consumers. This is validated by the company’s performance on the bourses. In the last 10 years, the company’s market cap has grown eight times. According to data from Bloomberg, of the total 53 analyst recommendations, the stock currently has 49 buy, 3 hold and one sell recommendation.