ITC's 64 mm budget brand cigarette sales to go up in GST regime

Currently, 69 mm category cigarette roughly contribute the largest annual sales volume at 30-35%

Sales of ITC Ltd’s 64 mm cigarette is likely to go up as people are projected to downgrade purchase of the 69 mm category post the recent 6-7 per cent price hike after GST roll-out. Although analysts project the company is likely to suffer a decline in its sales volume, operational margins.

Currently, the 69 mm category cigarette roughly 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 84 mm, comprises 20 per cent of the volume while the rest of the sales come in from the 74 mm category.

"It should be noted that 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", Sameer Deshmukh, research analyst with Reliance Securities told Business Standard reasoning the cause of 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 decline in demand of the 69 mm category which made 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, which had a lower Value Added Tax (VAT) like 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, 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", Naveen Trivedi, research analyst with HDFC Securities told this newspaper.

As a result, in the near term, while the Kings brand of cigarette sales will continue to contribute 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 few fiscal quarters which will affect the topline. In the last fiscal year, cigarette sales accounted 62 per cent of the company's annual sales of Rs. 55,001.69 crore.

Deshmukh, like many other analysts, now opines that for the 2017-18 fiscal year ITC Ltd's topline will grow by 9-10 per cent than the earlier projection of 16-18 per cent.

Sanjiv Puri, CEO and executive director of ITC Ltd is also pessimistic about the sales volume. "Tax increase results in the legal duty paid on cigarette sales coming under stress while sales of non-duty paid illicit cigarettes goes up", he told this news daily 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 operational margins will remain stable. There will definitely be a hit in the topline but the bottomline will remain stable" an analyst with brokerage firm Prabhudas Lilladher told Business Standard.

Puri however, didn't comment on the effect on the company's operating margins and the bottomline. "As a policy, we don't give guidance", he said in response to the query.

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

 

	Gross Revenue from cigarette sales (in Rs Crore)	Gross Profit from cigarette sales (in Rs. Crore)
Quarter ended June 30, 2017	8,774.16	3,274.14
Quarter ended March 31, 2017	8,954.94	3,258.76
Quarter ended December 31, 2016	8,287.97	3,033.69
Quarter ended September 30, 2016	8,528.47	3,216.88
Quarter ended June 30, 2016	8,230.60	3,004.58