Analysts say ITC, India’s largest cigarette maker may need a 10-15% cigarette price hike as volume growth takes a hit following India’s finance minister, Nirmala Sitharaman’s, proposed higher levies on cigarettes and other tobacco products in the Union budget.
Following the announcement of the tax hike, ITC’s stock dropped 7%, recording its biggest one-day decline since July 2017 and also ended as the biggest laggard on the Sensex. An analyst with Credit Suisse said, “This will require a 10-15% price hike, in a very weak macro environment causing high single-digit volume decline. Even after taking price hikes of over 10%, cigarette EBIT is likely to be flat in the best case in FY21.”
Phillip Capital and Edelweiss have downgraded ITC stock following the budget, estimating a 6-7% hike in cigarette prices by ITC.
An Edelweiss analyst said, “The NCCD component has been increased by 2-4 times across stick sizes. This has resulted in tax hikes in the range of 9-15% thereof. The tax hikes, in effect, at the portfolio level is likely to be about 11% which means the company would need to raise MRP by 6-7% to offset the same.”
A Phillip Capital analyst said, “We believe ITC will have to take a price hike of at least 6-7% on a weighted average basis, even if it has to maintain similar EBIT in INR as it will deliver in FY20. ITC’s volume growth for FY21 is likely to take a knock across all lengths, with maximum impact in DSFT due to a subdued economic environment and increased competition from GPI and VST Industries.”