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Sharp price increases to weigh on volumes
News reports indicate price increases being taken across brands
* There have been news reports about cigarette price increases ranging from 6% to 20% across brands this week.
* Average price increases appear to be in the 12-13% range.
* Our channel checks indicate that price increases have been taken across the country.
Price increases higher in lower-sized sticks
* Surprisingly, news reports indicate that price increases in the king size (KSFT) segment are lower than those in the deluxe size (DSFT) segment.
* While this is in line with the National Calamities Contingent Duty (NCCD) increase in the budget (where the hikes were higher in the lower-end segments), we believe that steep hikes in these segments pose the risk of volumes decline over the next few quarters.
Price increase higher than expected and taken in one shot
* For ITC, we had expected 7-8% price increase post the budget in a staggered manner.
* However, the extent of the price increase (according to news reports) means that EBIT margin is likely to expand but at the cost of volumes.
Shadow of illegal cigarettes looms even more eerily
* In our view, the steep price hikes could pave way for more illegal cigarette trade.
* This could prove to be a double whammy for organized players, which may have to face further pressure on volume growth.
ITC’s volume and Cigarette EBIT growth to come under pressure
* Despite no GST increase since Jul’17, volume growth has averaged less than 3% in the subsequent quarters. In fact, there has been slowdown in volumes and also some downturn in recent quarters.
* Over the past year, ITC has been losing market share to Godfrey Phillips (GPL). If GPL does not respond with a similar quantum of price hikes, ITC may lose market share further.
* Moreover, ITC’s Cigarette EBIT growth has moderated in recent quarters due to the downtrading. In 3QFY20, Cigarette EBIT growth was the lowest in the past nine quarters.
* Since Cigarette segment contributes ~85% of total EBIT, ITC’s overall earnings growth will also likely come under pressure over the next few quarters.
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