Although the government on Wednesday proposed a 16% hike in NCCD on cigarettes in the union Budget, analysts observed that it is likely to have a “nominal overall effect” on cigarette companies like ITC.
Cigarette companies would need to raise prices by only 2–3% due to the increase in National Calamity Contingent Duty (NCCD), and that would not be a big ask since legal cigarette prices have not risen a lot over the past two years, the analysts pointed out.
While presenting the Union Budget 2023-24 in Parliament, finance minister Nirmala Sitharaman said, “National Calamity Contingent Duty (NCCD) on specified cigarettes was last revised three years ago. This is proposed to be revised upwards by about 16%.”
Commenting on the proposed increase in the NCCD, Abneesh Roy, executive director, Nuvama Institutional Equities, in a note, said, “A 16% hike in NCCD on cigarettes in the FY24 Budget is a step in the right direction as this shall lead to a nominal overall tax increase, and implies stability in taxation. This increase is lower than Street’s/our expectations, and we expect legal cigarette players to gain share from the illegal ones. It also lends visibility to higher volume growth in FY24.”
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On Wednesday, the country’s largest cigarette maker ITC
Analysts, tracking the sector, were expecting a cigarette tax hike in the Budget as the last tax hike had been three years ago. And, there has been a laudable recovery in legal cigarette volumes this year.
“Cigarette companies will need to raise prices by 2–3% — not a big ask since legal cigarette prices have not risen a lot over past two years,” Roy said.
Notably, during FY13 to FY17, duty on cigarettes increased sharply at a compound annual growth rate (CAGR) of 15.7%. However, tax revenue from cigarettes grew a mere 4.7% CAGR. Thereafter, relative stability in taxation was observed until January 2020, revenue collections grew by 10.2%. The union budget for FY21 increased the National Calamity Contingent Duty (NCCD) by 2-4 times across cigarette stick sizes, resulting in tax hikes of 9-15%.
A 16% hike in NCCD in the Budget for FY24 has resulted in an overall tax hike of 2–2.5%, according to Nuvama Institutional Equities.
In FY23, legal cigarette players regained market share from illegal players, given no tax hike for two consecutive years. Given the nominal overall tax hike in FY24 Budget, the analysts expect this momentum to sustain.
“The cigarettes segment of ITC rebounded in FY23 as volumes have surpassed pre-pandemic levels. ITC continues to counter illicit trade and reinforce its market standing by fortifying its product portfolio and presence in focus markets. ITC’s FMCG business is focused on premiumisation and gaining market share. Ebitda margin expansion is on track,” Roy said in the note.
“The 16% hike in NCCD announced during this union Budget has a nominal overall effect; it is hence positive for cigarette companies. We expect legal cigarette players to continue to gain market share from illegal players with ITC leading the pack. This lends greater visibility to its higher volume growth in FY24E,” Roy added. ITC did not offer any comment on the proposed increase in NCCD on cigarettes.
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The country’s largest cigarette maker, in a statement issued after its second quarter results this fiscal, had said as seen in the past, stability in taxes on cigarettes, backed by deterrent actions by enforcement agencies, continued to enable volume recovery for the legal cigarette industry from illicit trade, thereby engendering domestic demand for Indian tobaccos, while also mitigating loss of tax revenue to the exchequer.
During Q2FY23, revenue from the company’s cigarette business rose 23.26% year-on-year at Rs 6,953.80 crore, while operating profit from the segment increased 23.61% year-on-year at Rs 4,429.31 crore during the period.