2 min read.Updated: 13 Mar 2015, 12:39 AM ISTManish Basu
ITC shares jumped 2.35% on the news, outperforming broader stock market indices
Kolkata: Shares of ITC Ltd jumped 2.35% on Thursday, outperforming broader stock market indices, on news that the company is raising the prices of all its key cigarette brands by 13-21.3% in the wake of a steep excise duty hike announced on 28 February.
ITC’s shares closed ₹ 7.95 higher at ₹ 346.25 each on BSE Ltd, while the bourse’s benchmark Sensex gained 0.95%, to close at 28,930.41 points.
The price of Insignia—the most expensive brand in the ITC stable—is being raised by 20%, and a pack of 20 will cost ₹ 300.
A pack of 20 of India Kings is to cost ₹ 250, up from ₹ 220, and other 84mm cigarettes such as Gold Flake Kings, Classic and Benson and Hedges are to cost ₹ 218 against ₹ 190 currently.
The price hike is in line with the 15% increase in excise duty on this category of cigarettes.
The price of one of ITC’s most popular brands, Wills Navy Cut, is being raised from ₹ 69 to ₹ 78 for a pack of 10—an increase of 13%, which is the lowest among all its top brands.
The price hike in the 64mm category is expected to be in the range of 15-21.3%.
ITC declined to comment, saying packs with revised prices have not yet been distributed.
Analysts say the price hike is likely to lead to a further contraction in sales by volume and shrinkage in margin, especially in the 64mm category.
Edelweiss Securities Ltd estimates ITC’s cigarette sales by volume to plunge by 8% in fiscal 2016. Even so, it says, operating profit from the segment is going to grow over the current year, but at a modest 8%.
This will, to some extent, impair ITC’s ability to expand its other businesses, especially the non-cigarette consumer goods business, because cigarettes still generate 80-85% of its profit.
In the last two budgets, excise duty on cigarettes was increased by 21% and 18%, respectively, forcing ITC to raise prices. But as cigarettes get more expensive, smokers are refusing to cough up higher prices. They are trading down to cheaper brands or to cigarettes smuggled into the country, or switching altogether to other forms of tobacco.
The impact of this change in consumption pattern was most visible in the quarter to December in which ITC’s cigarette sales by volume were estimated to have shrunk 9% year-on-year. The trend is likely to continue for at least four years, said an Edelweiss report released on Thursday.
The Tobacco Institute of India, a lobby group, had said in response to the budget proposals that another round of hike in excise duty will lead to a further expansion of the sale of contraband at the cost of compliant producers. It estimated the revenue loss to the national exchequer on account of this at ₹ 7,000 crore a year.
Cigarette makers such as ITC contribute about 85% of the government’s revenue from tobacco products, whereas cigarettes account for only 12% of tobacco consumed in India, according to the Tobacco Institute. It lobbied the government for a reversal of its tax policy on cigarettes, citing an unprecedented 7% decline in tax revenue between July and December last year.