ITC may not hike cigarette prices after tax rate cut, ban on vaping

A Morgan Stanley report says it doesn't expect ITC to hike cigarette prices as the firm is likely to be one of the biggest beneficiaries of the tax cut

Fast-moving consumer goods major ITC, which has reaped the benefits of a corporation tax cut and the ban on vaping in the country, may not have to increase prices of cigarettes for the rest of this financial year.

In a bid to revive the economy, the Centre last month announced a reduction in corporation tax rate from 30 per cent to 22 per cent. A Morgan Stanley report states that it doesn’t expect ITC to hike cigarette prices as the firm is likely to be one of the biggest beneficiaries of the tax cut. Yet, Morgan Stanley estimates that ITC will be able to post 19 per cent earnings growth during the 2019-20 financial year.  

“The corporation tax rate cut will help rejuvenate the economy and trigger a virtuous cycle of investment, consumption, and employment. According to our policy, we do not comment on specific brokerage reports on ITC and the company’s pricing strategy across operating segments,” an ITC spokesperson said.

After Union Finance Minister Nirmala Sitharaman announced sops last month, ITC’s Chairman and Managing Director Sanjiv Puri had said the measures could trigger a cycle of investments, consumption, and employment and set the stage to make India a vibrant, best-in-class, and globally competitive manufacturing hub for the world. 

 

Sector analysts are of the view that the tax windfall can be used to spur investment and can also be ploughed back to keep prices in check. “Even if ITC resorts to increasing cigarette prices, it will be in low-single digit and will be applicable on select part of the portfolio,” said Abneesh Roy, executive vice-president at Edelweiss Securities.

Cigarette price hikes are more driven by tax increases rather than input costs as input cost variations are a minor part of the entire cost structure of cigarettes, say analysts. However, as a measure to boost consumption, experts believe that an increase in taxes, which might pull up prices, is unlikely in the near future and thus, ITC’s cigarette sales volume may see an uptick.

According to Roy, in the first quarter (Q1) of this financial year, cigarette volume growth for ITC was only 3 per cent. However, calibrated price hike of 2.5 per cent in Q1, led to cigarette revenue growing by 6 per cent on a year on year at Rs 5,433.4 crore.

Cigarettes account for around 80 per cent of ITC’s profits. Sources among the brokerages are also bullish on cigarette sales after the government imposed a ban on vaping. While liquid nicotine and e-cigarette importers have been hit hard, ITC is expected to be a direct beneficiary as cigarettes comprise its entire tobacco portfolio.