The Finance Minister announced the budget for FY14. Three observations for ITC and the cigarette sector: (1) Across the board excise increase for cigarettes of 18% yoy, except cigarettes shorter than 65mm where excise duty remained unchanged. (2) No ad valorem duty was imposed in the budget. ITC will not need to alter its pricing to adjust for ad valorem duty; (3) Sub-65 mm category continues, which will give cigarette companies the option to further explore wide launches in this category.
Our analysis suggests that ITC will have to take price increases of 15% for Gold Flake, 15% for Navy Cut and 25% for Classic to offset increases in excise duties and maintain trend EBIT growth.
We also feel ITC is well placed for a wider launch of their sub-65 mm cigarette as there is significant tax arbitrage
