ITC – Excise Hike Steeper Than Expected

In 2008-09 budget, excise duty on non-filter cigarettes has been increased – for non filter plains, excise has gone up from Rs0.562/stick to Rs1.323/stick, whereas that for micros has gone up from Rs0.168/stick to Rs0.819/stick. Excise on filter cigarettes has not been increased; however, the overall weighted excise duty increase for ITC works out to 16%.

Micros and plains constitute 20% of ITC’s revenues. In the new excise structure, duties on plains will be higher than the RSFT cigarettes. We believe ITC is better off exiting the plains segment and introducing an RSFT brand at a lower price. Currently, plains are priced at Rs1.5-1.75/stick, whereas micros are priced at Rs2-2.5/stick.

Smaller players, like VST and GPI, which mainly manufacture plains and micros and have a 15% overall market share may find it tough to pass on the excise hikes. We believe that larger players like ITC can cross subsidize the non-filter lower end cigarettes and will gain market share from the smaller non-filter players.