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Cigarettes volume to decline 7-8% on punitive tax

The Union Budget 2015 demonstrated that it is moving in tandem with global practices on curbing tobacco consumption

Malini Bhupta  |  Mumbai 

The market was pricing in a 10 per cent rise in excise duty on cigarettes. But it seems the government is following global principles, and tax authorities are collaborating with the Framework of Convention for Tobacco Control, to curb tobacco consumption.

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.

Read our full coverage on Union Budget

Read our full coverage on Union Budget 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.

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First Published: Sun, March 01 2015. 00:45 IST