The government has announced a 10% y-o-y hike in excise duty (RCMLe 15%) on cigarettes across segments in the Union Budget 2016-17. After a 15%+ hike taken for four straight years, the 10% hike comes as a respite for cigarette players. We expect ITC to easily pass this on to consumers with a minimal impact on volume growth. We accordingly raise estimates and our March 2017 TP to R350 (from R330). We, however, expect a marginal decline in FY17 cigarette volumes and muted demand to hurt ITC’s other businesses.
The government has hiked the excise duty on cigarettes by 10% across segments, which is lower than our estimate of a 15% y-o-y hike as well as increases of 15%+ y-o-y taken during the last four years. We expect ITC to easily pass on the excise hike to consumers with a minimal impact on its cigarette volume growth.
ITC’s cigarette EBIT CAGR has slowed down to 3% y-o-y over 9MFY16 as cigarette volumes declined due to a pass-through of excise hikes via price increases. However, with the government providing some respite to cigarette companies by hiking excise duty at a lower rate in the current budget than previous ones, we estimate ITC to report an EBIT CAGR of 10.5% over FY15-FY18E. We however build in a marginal 2% y-o-y decline in cigarette volumes for FY17 and flattish growth for FY18.
We raise our FY17/FY18 earnings estimates by 4.7%/6.6% to factor in the lower decline in cigarettes volumes than estimated earlier. We maintain ‘hold’ on the stock as sluggish consumer sentiments continue to impact ITC’s other businesses.