ITC: The cigarette stick story

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: Just when ITC was getting re-rated on the markets, caused by growth in volume and its foray into the branded food products segment, the Budget dealt another blow. The excise duty on non-filter cigarettes has been increased - for non filter plains, the rate has gone up from Rs 0.562 a stick to Rs1.323 a stick. For the smaller or micros it has gone up from Rs 0.168 a stick to Rs 0.819 a stick. While it is true that ITC might not be as badly hit as some of its peers in the tobacco business, the company will be affected nevertheless. With around 20% volumes from non-filter and more than 10% of profits, the filter business accounts for bulk volumes for ITC. Moreover, while the excise on filter cigarettes has not been increased; however, the overall weighted excise duty increase for ITC works out to 16% to 17%.

And this is the second year in a row of 17%-18% tax increases for ITC, while last year’s increase had seen an imposition of 12.5% VAT. It is the strong brand that ITC presents in the market place that saw the cigarette volume being sustained. Analysts are now waiting for ITC to react to these events. There could be a uniform price hike across segments or a moderate price hike on filters is made and a de-focus on the non-filter segment. Some reckon that if ITC migrates from plains to filters, it will loose a large portion of micros to bidis, leading to a volume drop of around 50% in the non-filter segment. A CLSA-Asia Pacific Market report states that the difference between the cheapest cigarette made by ITC and a bidi is likely widen to around 5 times (from 2 times earlier). This will then impact the long-term volume growth as the conversion from bidis to cigarettes, which is a huge market, would take a hit.