
Cigarette stocks such as ITC Ltd, Golden Tobacco Ltd, Godfrey Phillips India Ltd and VST Industries Ltd are in focus ahead of Interim Budget 2024. The ‘vote on account’ Budget is unlikely to bring in any major changes, but a moderate increase in excise duty on cigarettes is likely. Emkay Global said it does not expect any tax changes in the upcoming Budget but see the possibility of implementation of GST levy shift to retail touch points from factory gates now.
"As ITC takes price hikes to pass the increase in tax, we expect margins to expand, which will aid in high single-digit EBIT growth over FY25-26," said Emkay Global.
Prabhudas Lilladher said it sees chances of a moderate rise in excise duty on cigarettes.
Changes in cigarette taxation and disruption in supply chain are key risks, Centrum Broking said last week following cigarette maker VST Industries' quarterly results.
For VST Industries, volumes for the third quarter were down 4 per cent YoY due to persistent weakness in rural demand and weaker. For the largest cigarette maker ITC, volume de-grew 2 per cent for the December quarter, largely due to a higher base. BNP Paribas said volume growth may recover to 3-4 per cent in FY24, unless taxes on cigarettes are raised sharply.
The ITC's cigarette business has continued to counter illicit trade and reinforced market standing by fortifying the product portfolio through democratising premiumisation across segments and enhancing product availability amid superior on-ground execution, Nuvama Institutional Equities said.
"When seen on a normalised basis (4yr CAGR), cigarette volumes grew 4 per cent in Q3,Q which is in the ballpark of that seen in recent few quarters. Cigarettes revenue grew 3.6 per cent (4yr CAGR of c.9 per cent) driven by better mix and pricing. Premium segments and differentiated variants continued to perform well. Cigarette net margin was flattish yoy as higher taxes and costs escalation were mitigated by better mix, strategic costs interventions and calibrated price-hikes," it said.
A sharp escalation in costs of leaf tobacco and certain other inputs, along with increase in taxes were largely mitigated through improved mix, strategic cost management and calibrated pricing, it said.
"As seen in the past, stability in taxes on cigarettes, backed by deterrent actions by enforcement agencies, enables volume recovery for the legal cigarette industry from illicit trade leading to higher demand for Indian tobaccos and bolstering revenue to the exchequer from the tobacco sector," Nuvama said in ITC's results review.
Phillip Capital said structural trends with regard to stability in taxes and stringent action via government on illicit cigarette is helping to expand size of duty paid cigarette and ITC, being dominant market leader is benefitting out of the trend.
Also read: Budget 2024 live: FM's speech at 11 am, taxpayers, investors wait with bated breath
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