Cigarette
Concerns over hike in excise duty on cigarettes weigh on ITC shares. Picture: A man smokes a cigarette as he sits on a pavement along a road in Srinagar, 4 September, 2012.Reuters

The share price of ITC came under selling pressure Monday, amid concerns over a hike in excise duty on cigarettes in the upcoming Budget.

ITC shares touched an intra-day low of Rs 263 on the Bombay Stock Exchange (BSE) before paring some losses and closing at Rs 298, down a little over 2 percent. However, the benchmark indices traded in the positive territory, with the BSE Sensex ending 76 points higher and the 50-share Nifty gaining by 24 points.

With ITC already struggling with slowing growth in cigarette volumes, further increase in excise duty on them is likely to hit the company's sales in the segment.

Analysts expect the government to raise excise duty on cigarettes in the range of 10 percent to 17 percent in the budget.

While Kotak Securities expects the government to announce a 5percent to 10 percent increase in excise duty on cigarettes in the Budget, Motilal Oswal expects blended excise duty to rise by 10 percent.

"If duty hike is in line with our expectations, we would expect the impact on ITC to be positive. A 15 percent hike in duties shall have a negative sentimental impact; however, we believe it is factored into the price as of now," Kotak said in a report sent to moneycontrol.com.

The cigarette industry has been witnessing a decline in volumes in the past few quarters due to a continued increase in excise duty for four straight years. In last year's budget, excise duty was increased 25 percent on cigarettes that are less than 65mm in length and 15 percent for those more than 65mm in length.

"Governments have been invariably increasing excise duties on cigarettes by a significant proportion in budgets over the past few years, which has resulted in continuous decline in cigarette sales volumes. In the upcoming Budget, the industry is expecting just a marginal hike in excise duty on cigarettes, which would provide some respite to the industry. On such anticipation, we are positive on ITC," said Angel Broking in a note.

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