Why cigarette sales have gone down in India
What's the story
A recent hike in excise duty on cigarettes and tobacco products has impacted the sales of ITC and Godfrey Phillips. The move has resulted in a price increase of ₹22-25 per pack for some brands, leading to a decline in cigarette sales by up to 5% in March. The impact is likely to be reflected in the financial results for the March quarter.
Tax impact
Government increases excise duty on cigarettes and tobacco products
The government has increased the excise duty on cigarettes and tobacco products over and above the highest 40% GST slab rate, effective February 1. The new tax structure has resulted in a minimum price increase of ₹22-25 per pack of 10 sticks to as much as ₹55. The hike is based on the length and type of product, with an excise duty range of ₹2,050-8,500 per thousand sticks.
Market reaction
Cigarette stocks decline
Following the tax hike announcement, cigarette stocks have witnessed a decline of 10-17% in India. ITC has been the worst hit among Nifty 50 stocks, with its shares down by 17.55% to ₹300 levels. Godfrey Phillips and VST Industries have also seen their shares fall bya around 10% and 11%, respectively.
Future outlook
Analysts predict decline in sales volumes and margins
Analysts predict a 10% decline in sales volumes with near-term cigarette segment profit possibly falling by 15-20%. They expect the companies' margins to take a hit as the price hike may not be enough to offset the tax impact. Despite this, some analysts are cautious about recommending an exit from ITC and Godfrey Phillips shares based on just one quarter's numbers.
Investment advice
Wealthmills Securities advises long-term investors not to panic
Kranthi Bathini of Wealthmills Securities has cautioned that any decline in sales will directly affect both the top line and bottom line. However, he also said that it is difficult to assess the impact based on just one quarter's numbers. Wealthmills Securities advises long-term investors not to react immediately to this development as these companies have survived multiple tax hikes over decades.