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

The firm is likely to be a major beneficiary of the tax rate cut, and is likely to post a 19% earnings growth during FY20

ITC may not have to increase cigarette prices for the rest of the ongoing fiscal year after reaping the benefits of a cut in corporation tax rates and the ban on vaping in the country.

According to a report from Morgan Stanley, after the Centre announced a reduction in corporation tax rates from 30 per cent to 22 per cent, it doesn’t expect ITC to hike cigarette prices as the firm, is likely to be one of the biggest beneficiaries of the cut. It estimated that ITC will be able to post a 19 per cent earnings growth during the 2019-20 fiscal year.

Responding to a query on the issue, an ITC spokesperson said, “The corporate tax rate cut will help rejuvenate

the economy and also trigger a virtuous cycle of investment, consumption and employment. As per policy, we do not comment on specific brokerage reports on ITC and the company’s pricing strategy across operating segments.”

After union finance minister Niramla Sitharaman announced various sops to revive the economy, ITC’s chairman and managing director, Sanjiv Puri, had said the measures could trigger a cycle of investment, consumption and employment and had set the stage to make India a vibrant, best-in-class, globally competitive manufacturing hub.

“Investments channelled to the Food Processing sector and competitive agri-value chains will also provide significant fillip to the agri and rural economy, benefiting farmers and local communities. Research can be leveraged in the agri-food value chain not only for consumer-centric innovations but also to foster inclusive rural progress. The move to cut GST rates in the hospitality sector is laudable and will enhance the competitiveness of the tourism sector, enabling further growth and providing a significant multiplier to employment generation,” Puri had then said.

He added that measures such as expanding the scope of CSR to boost R&D in science, technology, engineering and medicine is path-breaking as it has the potential to spur innovation which is an elixir of growth for the future.

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 does increase cigarette prices, it will be in low single digits and will be applicable on a select part of the portfolio,” said Abneesh Roy, executive vice president at Edelweiss Securities.

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

According to Roy, in the first quarter (Q1) of the current fiscal year, cigarette volume growth for ITC was only three per cent. However, calibrated price hike of 2.5 per cent in Q1, led to cigarette revenue growing by six per cent on a year-on-year basis 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 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.