Both past and present Governments have gone all-out to milk revenues from cigarette sales and discourage cigarette consumption. Excise duties on cigarettes of various lengths have been revised higher in every Budget from 2012-13 onwards. For cigarettes of length below 65 mm, after a stiff 72 per cent hike last July, excise duties were increased by another 25 per cent in this Budget. Duty on cigarettes of length over 65 mm is up 15 per cent. The stock of ITC tanked 8.3 per cent on Budget day in response.
For ITC, the cigarettes business is its cash-cow, accounting for about 40 per cent of revenue and close to 85 per cent of profits. ITC has regularly passed on the duty rise to consumers, and the segment’s profit margins rose from 62.6 per cent in the March 2014 quarter to 69.7 per cent now.
But the steadily icreasing product prices have put off consumers; the segment’s revenue grew less than 1 per cent in the recent December quarter and has been slowing over the past two years, from the 15 per cent average growth in 2011 and 2012. Underlying sales volumes have been shrinking as well.
The latest duty hike will squeeze consumption further. ITC needs the buffer of its cigarettes business to support its investments in FMCG and hotels, which have low profitability.