New Delhi: India’s largest cigarette maker ITC Ltd will soon increase the price of its Classic cigarettes, continuing the trend of effecting an increase in the price of its premium cigarettes in recent weeks in an effort to improve or protect profitability in the face of more taxes and rising prices of inputs.

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dd32456e-543a-11de-a68f-000b5dabf636.flvAn increase in the price of premium cigarettes is unlikely to see a fall in demand, although a fall in prices could encourage some smokers to upgrade, say analysts.

The price of a pack of 20 Classic cigarettes will go up to Rs94 from Rs88, said a New Delhi-based distributor for the company, asking not to be identified. The proposed increase was confirmed by two other distributors.

The planned increase in the price of Classic comes days after the company increased the price of a 20s pack of Benson and Hedges by Rs10 to Rs100 and that of a 20s pack of 555 by Rs10 to Rs100. Both these changes were also confirmed by a cigarette seller in Connaught Place, New Delhi.

ITC didn’t respond to queries mailed to it on Friday, but another New Delhi-based cigarette seller, who did not want to be identified, claimed the company had effected frequent changes in prices in the past few months unlike earlier years when, he claimed, such changes would happen once or twice a year.

Mint couldn’t independently confirm this, although it did ascertain from retailers that in April, ITC had increased the price of a 10s pack of its popular Gold Flake Kings cigarettes by 10% to Rs44.

More hikes: Various brands of ITC cigarettes, among others, at a cigarette shop at Connaught Place in New Delhi. The company dominates the cigarette market in India with a strong 84% share. Rajkumar / Mint

“After the increase in value-added tax (VAT) last year, ITC has been increasing prices of various brands one after another. But because most of them are premium brands, it will not impact volumes," said Vanmala Nagwekar, research analyst at brokerage firm India Infoline Ltd. In 2007-08, the government imposed VAT on cigarettes to the tune of 12.5% of retail price.

However, Sameer Deshmukh, an analyst with Mumbai-based brokerage Tata Securities Ltd, said the company could see demand stabilize or stop growing if it effected similar price hikes in its low-priced brands. Even then, he added, ITC had more leeway to increase prices than other companies in the consumer products business.

Unlike other consumer goods companies, ITC does not have to worry about competition. For instance, when Hindustan Unilever Ltd, or HUL, hiked prices of its soaps, people shifted to other brands, such as Godrej. But in the case of cigarettes, brand loyalty is very strong. Smokers do not shift brands easily.

ITC, which dominates the cigarette market with a strong 84% share, hasn’t explained the motive for the hikes, but Deshmukh said they could be a response to more taxes and higher cost of raw material.

“In the last two years, the cigarette industry has seen a steep increase in the excise (duty) on non-filter sticks, a value-added tax of 12.5% on maximum retail price, and last week, in Maharashtra, VAT went up to 20% on cigarettes. These factors, along with a 70% increase in the cost of tobacco and ITC’s investment plans in non-cigarette businesses, are the reasons behind the hike," said Deshmukh of Tata Securities in a Monday interview.

Over the years, ITC has diversified its portfolio by investing in businesses such as agriculture, paper, food and personal care products, apparel, and hotels.

“The hotel business was significantly impacted by the twin blows of economic slowdown and negative travel advisories arising from the Mumbai terror strikes," said a 1 June report by Tata Securities.

The report added that the non-cigarette personal and consumer products business of ITC would break even only in 2011-12.

ITC posted a 1.1% year-on-year (y-o-y) decline in revenue to Rs3,892 crore for the fourth quarter ended March. Its net profit for the quarter was Rs809 crore, 10% up compared with the year-ago number. The company ended the year to March with revenue of Rs15,388 crore and net profit of Rs3,264 crore.

“The cigarette division, for the quarter, registered 10.2% growth in gross revenues (16.3% y-o-y growth in net revenues) on the back of better realizations (because of price hikes) and improved product mix," said a 22 May report by Angel Broking Ltd.

ITC’s rival Godfrey Phillips India Ltd (GPI), which sells cigarettes branded Four Square, Stellar, Cavanders and Red and White, said ITC’s price hikes could be a way to raise money for its newer businesses.

“The company is diversifying into other areas, for which it needs money to invest. Cigarettes are the major contributor to its earnings," said Neeta Kapur, vice-president, marketing, GPI. GPI hiked the prices of two if its cigarette brands in September, and doesn’t plan on any immediate increase in prices, Kapur added.