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ITC's budget cigarette brand sales to rise under GST regime

Avishek Rakshit / Kolkata 31 Jul 17 | 06:03 AM

A man talks on his mobile phone as he walks past an ITC office building in Kolkata. (Photo: Reuters)

Sales of ITC Ltd’s budget cigarette brands in the 64 mm category is likely to go up as people are projected to downgrade purchases from the 69 mm category post the recent 6-7 per cent price hike as a result of higher taxes under the GST regime. Although analysts project the company is likely to suffer a decline in its sales volume, operational margins of the company are poised to remain stable.

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The 69 mm category is currently estimated to contribute the largest annual sales volume at 30-35 per cent while the 64 mm budget brand category contributes 25 per cent of total sales. The premium priced king size or the 84 mm category, comprises 20 per cent of the volume while the rest of the sales accrue from the 74 mm category.

“It should be noted that the upper category, where prices have touched Rs 150 for a pack of 10 sticks, is mostly inelastic in consumer demand, while the demand elasticity is very high in the 69 mm and 64 mm categories," said Sameer Deshmukh, research analyst with Reliance Securities, while discussing the rationale behind the change in the projected consumption pattern.

As per Deshmukh, the repeated price hike of cigarettes in the past, on account of higher taxation, has led to a decline in demand in the 69 mm category that has, in turn, compelled the company to come up with several brands and extensions in the 64 mm segment.

The major decline in sales volume, as well as downgrade from 69 mm to 64 mm, is poised to take place in states that had a lower Value Added Tax (VAT) rate. Among these are West Bengal (12 per cent), Madhya Pradesh (13 per cent) and Chhattisgarh (12.5 per cent). Under the GST regime, which has effectively brought in uniform prices across the country, the effective prices of cigarettes will shoot up sharply.

“The major impact on volume and any subsequent consumption downgrade is expected to be mostly in these regions," said Naveen Trivedi, research analyst with HDFC Securities.

As a result, in the near term, while the Kings brand of cigarette sales will continue to account for around 20 per cent of total sales volume, the 64 mm brands will increase their contribution to 40 per cent at the cost of the 69 mm category, which is expected to shrink.

Analysts now feel that ITC Ltd’s cigarette volume sales growth will be marginal or even flat in the coming financial quarters- a factor that will affect the company’s top line. In the previous financial year, cigarette sales accounted for around 62 per cent of the company’s annual sales of Rs 55,001.69 crore.

Deshmukh, like many other analysts, now opine that for the financial year 2017-18, ITC Ltd’s top line will grow by 9-10 per cent, instead of the earlier projected estimates of 16-18 per cent.

Sanjiv Puri, CEO and executive director of ITC Ltd is also pessimistic about the sales volume. “Tax increase brings the legal duty-paid cigarette sales under stress, while sales of non-duty paid illicit cigarettes goes up", he told the Business Standard after a press conference.

The recent average price increase across brands has been to the tune of 6-7 per cent. Analysts say this increase is in tune with the effective taxes in the pre-GST era and the company has passed the tax burden on the consumers.

“As a result, its operating margins will remain stable. There will definitely be a hit in the top line but the bottom line will remain stable," said another analyst associated with the brokerage firm Prabhudas Lilladher.

The ITC chief, however, didn’t comment on the potential effect on the company’s operating margins and the bottom line. 

Analysts pointed out that historically the profit margins of the company have remained stable despite price hikes in the past.

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