Tobacco major ITC is in no mood to leave anything to chance. In an attempt to hedge its bets, the Kolkata-headquartered company has raised the price of its flagship brand Gold Flake Kings by as much as 15% this week.
A pack of 10 Kings cigarettes will cost Rs55 this week, up from Rs48 in the last. The hike, analysts said, stems from an anticipation of a 15% excise hike on tobacco products in the upcoming Union Budget.
A single cigarette is now dearer by `1, thanks to the recent price hikes by the company. For instance, earlier, a Gold Flake Kings stick was priced at `5, but from Wednesday, dealers have started commanding `6.
It’s not that ITC was not prepared for this scenario. The company has already passed on a 4% average price hike to consumers across its brands, namely Capstan, Scissors, Berkeley and Wills Flake Filter in recent months. And the latest one is basically an extension of that to mitigate the impact of a tax burden and adequately protect its margin turf.
ITC had gone for a 10% price hike for its Classic brand in August and another 10% for Navy Cut in September. The urgency on the part of the company is explained mostly by a 12-15% jump in value added tax (VAT) rates in Tamil Nadu, West Bengal and Andhra Pradesh. In February, the company had jacked up prices by 5% across the portfolio.
Despite higher pricing, analysts think ITC should not worry on the volumes front. They see the cigarette business to be in a sweet spot instead, going ahead. Kotak Institutional Equities Research analysts Manoj Menon and Amrita Basu tell you why. “Considering the addictive nature of cigarettes and the associated consumer behaviour, predictability in taxation — and hence, calibrated price increases — is the key for industry volumes,” they said in a note to clients on Tuesday.
In their words, ITC is creating ‘buffers’ for a potential excise increase in the Budget through the number of hikes in recent months. “Excise hikes on tobacco have a long-term relationship with the wholesale price index (WPI). This relationship points to a 15% excise hike for tobacco in FY13. Our analysis suggests that cigarette volumes are unlikely to decline in FY13 even if such an excise hike was implemented by the government,” Ambit Capital analysts Anand Mour and Shariq Merchant wrote in their report last month.
According to their estimate, ITC, which commands a 78% market share in terms of volume and 87% in terms of value through brands like Gold Flake, Wills and Lucky Strike, is expected to do it again with a 14% price hike in FY13 and post a 1% volume growth.
Comments