ITC’s Sales Likely to Drop 5% This Fiscal

India's largest cigarette manufacturer ITC may post up to 5% decline in sales this fiscal year because the company has already raised prices by more than 12% to negate the recent increase in taxes, while another round of price rise looks imminent, according to four analyst reports released in the past fortnight. This follows Uttar Pradesh government's decision to increase taxes on cigarettes to 50% from 17.5% last week, which will force the company to increase prices by another 1-2%, say analysts. Analysts' reports by Espirito Santo Securities, HDFC Securities, Ambit Capital and Sharekhan say any rise in cigarette prices have a short-term impact on sales, since ITC would invariably pass on the rise to consumers across India rather than a particular market. Anand Mour, analyst with Ambit Capital, says in his report, "We have seen that companies do not adopt differential consumer pricing in the market. We believe even in the case of UP (much like Rajasthan, which also implemented VAT of 50% on cigarettes), the pricing action will be pan-India rather than state-specific," he said. 

A just-published report by Espirito Santo Securities says that while ITC has not been given any official guidance for the next two years' cigarette volume growth, it expects this kind of price rise could result in a5% year-on-year volume decline as compared to street expectations of a flat 2% volume drop. "Our lowerthan-street estimates are on the back of a detailed study on the effectiveness of tobacco prices at reducing tobacco use in India. The study says a 10% increase in bidi prices would be to reduce the demand for bidis by about 6-9.5% which is also the case of cigarette users' response to price changes," the report says. 
In fact, analysts at Espirito Santo Securities and Ambit Capital feel the recent VAT hike in Rajasthan and UP is a likely precursor to similar moves by other states that want to improve their fiscal condition by heavily taxing tobacco products. According to their estimates, ITC has a huge exposure in four more financially vulnerable states. Nitin Mathur, analyst at Espirito Santo Securities, says ITC is heavily exposed to the most fiscally vulnerable states.