Smoking is injurious to health. Are cigarette price hikes now impacting ITC’s margins too? Nomura has maintained a ‘Reduce’ rating on ITC with a target price of Rs 318 per share. This implies nearly 2% downside from current levels. According to the international brokerage house, “while the lower-than-expected price hikes could cushion volumes, it will impact EBIT margins and growth more than previously expected.”
Will ITC undertake multiple price hikes to cushion sharp volume drop
Most of the cigarette price hikes in its premium brands (Gold Flake / Classic), undertaken by ITC range around 30% compared to Nomura’s expectations of 35-40%, and tax hikes of 40-45%.
As per Nomura’s estimates, the 35-40% hikes were required to maintain its sales realization/stick and EBIT/stick. “This indicates cigarette EBIT margin/growth will decline more than expected at 20% vs our expectation of 15% if ITC does not take another round of price hikes later during the year,” Nomura added.
The Japanese brokerage house believes that, given the significantly high quantum of the tax hike, “ITC might be taking price increases in stages to cushion the likely sharp volume decline.”
ITC: Volume Vs margin- tight ropewalk
Nomura pointed out that ITC is “playing the portfolio to salvage volume decline and create a competitive edge.”
ITC has launched a new variant of Gold Flake in a smaller Deluxe size (DSFT / 64mm) at a price similar to that of the Regular variant (RSFT / 69mm) at Rs 94 for 10 sticks. This, Nomura believes, could help in capturing the volume decline from Regular to Deluxe and would also result in higher EBIT/stick vs other Deluxe brands.
However, the resultant adjustment could still be slightly lower vs regular size, thus helping in cushioning the overall EBIT decline. ITC has hiked the price of one of its Gold Flake variants in Regular size (RSFT / 69mm) by 32% to Rs 125 for 10 sticks vs Rs 95 for 10 sticks previously.
The quantum of the price hike for Gold Flake Super Star brand in the Deluxe size (DFST / 64mm), currently at INR59 for 10 sticks, remains to be seen.
ITC: To watch out for competition in slims
Nomura estimates after the current round of price hikes, “the competition in slims may reduce from legal players, but illicit remains a challenge.” Godfrey Phillips has raised prices for one of its fast-growing brands, Stellar Shift in the Kings-Slims segment by 90% to Rs 19/stick, and will now compete with ITC’s premium brand Classic Connect.
Nomura pointed out that the price of Classic Connect was raised by only 30% to Rs 19.50/stick. “The change in GPI’s stance from focusing on volumes to margins could reduce the competitiveness in Slims, but the impact from illicit/imported brands in this segment remains a challenge,” added Nomura. This is because the illicit/imported brands continue to sell at Rs 10-15/stick.
Conclusion
Overall Nomura highlighted the tight balancing act that ITC has to undertake while managing volumes and margins. The big question is would there be a second round of price hike, going forward.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.