ITC bounces back, analysts say small-pack cigarettes likely

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Mumbai | Published: November 27, 2014 12:37:05 AM

The ITC scrip bounced back in Wednesday’s trade with analysts of the view that the company could take counter-measures...

The ITC scrip bounced back in Wednesday’s trade with analysts of the view that the company could take counter-measures to mitigate the impact of a possible ban on loose cigarettes.

According to a Jefferies report, although cigarettes could become less affordable for a certain segment of consumers, price elasticity, favourable product mix and introduction of smaller pack sizes could limit the impact on volumes for ITC.

Rajasa Kakulavarapu and Apurva Kumar at Jefferies in a note said that the Kolkata-based company could address the affordability gap to an extent with smaller pack sizes. Morgan Stanley also believes that the cigarette player can reduce impact of a ban by introducing a 5-stick pack.
In Wednesday’s trade, ITC gained as much as 2.9%, before settling 2.1% higher at R363.30 on the BSE.

ITC’s performance amid adverse policy environment in the past is a source of optimism for certain analysts. “ITC has negotiated an adverse policy environment in the past decade well – introduction of VAT on cigarettes in FY08, 3-5x increase in excise duty of non-filter cigarettes resulting in ITC’ exit from that segment in FY09 (20% of then volumes), ban on smoking in public places, pictorial warnings, three consecutive years of 15%+ excise duty increase since FY13 – and managed to grow its cigarette EBIT at 18.7% CAGR over FY09-14 and 17.1% over FY04-14,” Motilal Oswal observed in a note.

Jefferies’ analysts add that despite the increasing regulatory and taxation constraints over the years, ITC’s earnings have grown at a remarkably consistent and strong pace (c.18-20% p.a.), mainly driven by pricing and mix. “… we do not see major risks to this trajectory in the near future …,” they added.

On Tuesday, shares of ITC along with other cigarette players were under pressure as a Reuters report suggested that health minister JP Nadda in a statement to Rajya Sabha has said that his ministry has accepted the recommendation of an internal panel to ban the sale of single cigarettes.

ITC’s shares ended 5% lower to R355.7 on the BSE. Among other cigarette players, Godfrey Phillips (9%) and VST Industries (2%) ended in the red.

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