Homegrown FMCG giant ITC came up against a positive surprise on Wednesday, when the Budget announced just a 6% hike in excise duty on cigarettes. While the ITC stock made a 52-week high of Rs 269 soon after, the company is likely to see a rise in cigarette volumes after being down by almost 15% in the last six years.
With a hike in excise duty of just 6%, the lowest in six years, while the cigarette market is expected to see better days, the government has also shown a stronger hand against other forms of tobacco, including beedi and chewing tobacco. This year’s Budget saw an increase in basic excise duty of 33% on hand-rolled beedi and nearly 2.7 times on machine-made ones. An additional excise duty of 3% on pan masala, along with 6% each on guthka and khaini, has also been imposed.
Analysts agreed that while a soft stance on cigarettes was expected, the 6% hike in excise duty was lower than the expected hike of 8-10%. Analysts believe that cigarette volumes in the 2018 financial year are likely to see growth after being down by almost 15% between 2010 and 2016. Available data indicated that while ITC recently underwent a price increase of almost 14% in 69 mm and 74 mm cigarette brands, a near 4% price increase would be an easy task to counter the 6% excise hike.
This would mean a 5% increase in cigarette volume estimates for FY2017-18, as opposed to just 3% earlier, with an year-on-year earnings growth of 16.1% from 13.6% earlier. A market insider pointed out that cigarette consumption in India standing at 1/18th of China’s, the market provides enough opportunities for growth in the long term. “Moreover, ITC can comfortably pass on the 6% increase in excise duty to end-consumers, without hurting volumes much,” the analyst said.
