The excise duty hike on cigarettes announced in 2014-15 Budget is steep - in the range between 11 and 72 per cent. Duty on 64mm (long) cigarettes has been increased by 72 per cent and by 11-21 per cent on cigarettes of other shorter lengths. This amounts to a weighted average excise increase of around 21 per cent.
“Though the hike will have a bearing on ITC’s cigarette volume growth, we expect EBIT growth of 16 per cent YoY in FY15E. We expect the company to effect price hikes of 12-14 per cent in 65mm cigarettes and Rs 0.5-1.0 in 64mm cigarettes to counter the current duty increase. It has already effected around 11 per cent price hike in a few of its regular and long brands. The hike in 64mm category is harsher for other players, who have higher saliency in this segment. ITC can potentially gain share in the segment,” said Abneesh Roy, Associate Director - Institutional Equities – Research of Edelweiss.
Excise duty on cigarettes was raised by about 18 per cent in FY14 and 20 per cent in FY13; in spite of which ITC’s cigarettes EBIT clocked around 19 per cebt CAGR in over FY12-14; margin improved 300bps, indicating strong pricing power.
“We expect FY15 volume growth (3 per cent volume decline in FY14 and 1.5 per cent growth in FY13) to be under some pressure due to the current excise hike. ITC will have to effect 12-14 per cent price hike to counter the current hike to maintain EBIT margin of 35.3 per cent,” Roy added.