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ITC looks to push smaller cigarettes, tap beedi smokers

ITC looks to push smaller cigarettes, tap beedi smokers

New Delhi: To check falling sales, India’s largest cigarette maker ITC Ltd is exploring opportunities to launch a new category of cigarettes and is also raising the prices of some brands.

“ITC has submitted a recommendation to the government to allow it to create a new filter cigarette segment of less than 60mm size," said a person familiar with the development who did not wish to be identified.

Currently, only filter cigarettes that are 69mm, 74mm and 84mm long are allowed to be sold in the country.

“The proposal...will help the company tap non-filter smokers and beedi consumers," this person said. A beedi is a thin, locally made unfiltered cigarette wrapped in a tendu leaf.

The move to create a new category of cigarettes comes in the wake of a decline in the sale of non-filter cigarettes. The government had slapped hefty increases in excise duty in the 2008-09 budget on this segment that led to a steep increase in prices.

Excise duty on non-filter cigarettes that were less than 60mm long was increased by 387%. The hike was 142% for those between 61mm and 70mm long.

“The market for branded non-filter cigarettes actually got wiped out in the past one year because of the (increased) duty and the consequent price hikes," said Sameer Deshmukh, analyst, institutional equities, at Tata Securities Ltd.

In terms of volumes, non-filter cigarettes accounted for about 20% of cigarette sales before the excise hike. “Their share has now come down to 2%," said an ITC spokesperson. According to an industry estimate, the market for cigarettes in India is worth around Rs22,000 crore , and ITC has a lion’s share of this.

The cigarette maker said the increase in excise duty has led to the illegal manufacture and sale of non-filter cigarettes, which may be causing the government losses in taxes.

In an emailed response, an ITC spokesperson said: “In the long term, this is bound to slow down revenue growth from the tobacco sector. The industry has, therefore, been in dialogue with the government to suggest future initiatives that are in the best interests of industry and revenue generation to the exchequer."

An analyst said that if ITC gets a go-ahead to enter the new segment and prices its products competitively, it will be able to drive substantial volumes. “There are more number of non-filter consumers against filter cigarette smokers. So if companies decrease the size of a cigarette and make it affordable, they can drive growth," said Purnendu Kumar, associate vice-president, KSA Technopak, a retail consulting firm.

Cigarette sales contributed Rs5,545.30 crore to ITC’s revenue of Rs11,496.30 crore in the nine months to 31 December, compared with Rs4,904 crore out of revenue of Rs10,013.14 crore in the same period in 2007. Its net profit was Rs2,454 crore for the nine-month period ended December, against Rs2,384.46 crore in the same period of the previous year. The company doesn’t disclose segment-wise net profit.

Deshmukh of Tata Securities, however, said: “The cigarette business accounts for 90% of the company’s profits." According to him, after the hike in excise duty, there has been around 70-80% migration from the non-filter segment to the filter cigarette segment.

“Excluding the conversion, the filter segment volumes have grown by an average 4-4.5%. Volume decline for ITC in FY09 is expected to be around 3% to 3.5% in line with the industry," Deshmukh said.

ITC is also increasing prices of some of its brands by up to 10%. According to two Delhi-based retailers, a 10-stick pack of Gold Flake Kings that costs Rs40, will cost Rs44 from next week. The prices of Classic and Gold Flake Filter brands will also be increased by Re1 each from the current Rs44 and Rs28, respectively, for 10-cigarette packets, they said.

While confirming that the prices of select brands will be increased, the company spokesperson said: “We do not disclose our future strategies, including pricing strategies."

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