In 2014-15, the finance minister has raised the duty by 25 per cent on cigarettes below 65 mm and by 15 per cent on other categories. With such a rise, cigarette makers’ price-earnings multiples are likely to contract.
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Historically, duties on cigarettes moved in line with wholesale inflation. But the trend changed since 2012-13, and a punitive tax regime came in. Though the market was expecting a 10 per cent rise — after last year’s 18 per cent blended duty increase — the government showed it wanted to move the way other countries taxed tobacco products.
According to Edelweiss Securities’ Abneesh Roy, this fourth straight duty hike — a weighted average excise increase of 16 per cent — could affect ITC’s cigarette volume growth. He expects the firm’s annual cigarette Ebit growth to be eight per cent in 2015-16, ITC could go for a price increase of 12-13 per cent price for the 65-mm cigarette category and above, and a Rs 0.5 a stick for 64-mm ones.
ITC’s cigarette volume growth was earlier estimated to return to a high single digit in 2015-16. But after a nine per cent decline in volumes in 2014-15, cigarette makers could see a fall of seven-eight per cent next year.