Lower taxes to fire up revenues, earnings for cigarette makers

Shares of cigarette companies were among the biggest gainers on Monday after the central board of excise and customs last weekend clarified on the goods and services tax structure on cigarettes. The new tax structure is expected to be about 6 per cent lower at around 58 per cent vs 63-64 per cent earlier. While ITC (up 5.7 per cent), VST Industries (4 per cent) hit their 52-week highs, Godfrey Phillips India too was up 2 per cent. The key beneficiary though is seen as ITC, which commands an estimated 80 per cent market share in the duty-paid cigarette industry in the country. There are twin triggers for the optimism around cigarette makers. The first is the boost to volumes given the expectation of lower cigarette prices. Cigarette prices are likely to decrease by 8-10 per cent primarily in the 64 mm category, which will lead to a 5-7 per cent volume growth annually over the next two years. For the past five years, the legal cigarette industry has seen a decline of 5-6 per cent in its sales volume, while illegal trade has gained. Abneesh Roy of Edelweiss Securities believes if these (6-7 per cent gains) are passed on there is volume benefit estimated at 5 per cent for FY18 for ITC. Given ITC’s market share, pricing power and largely inelastic demand it will benefit the most among cigarette makers from the lower indirect taxes. An ITC spokesperson told Business Standard that the company welcomes GST and is taking effective steps to pass on the benefits to the consumer wherever such benefits accrue due to the recently announced GST rates. Nifty Trading Tips