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Company continues to increase prices to create a buffer before the Budget.

It’s that time of the year when markets start speculating whether or not the government would raise taxes on cigarettes. Given the current economic conditions, the market is expecting an increase in the excise tax for cigarettes in the central budget next year. From the look of it, so are cigarette companies. Perhaps, this is why ITC, which undertook price increases for most of its brands through the year, has hiked price of Gold Flake Kings by 10 per cent this week.

Analysts say the company has undertaken calibrated price increases through this year, to create some buffer before the Union budget, such that consumers are not faced with a sudden shock. This is expected to help the company, believe analysts. According to Kotak Institutional Equities, “Through the price increases in Classic (10 per cent), Wills (15 per cent) and GFK and in the regular size filter segment (RSFT), ITC has likely created buffers for a potential 10 per cent excise increase in the budget, in our view.”
Analysts say, given the addictive nature of cigarettes, consumption is not affected when there is predictability in the pricing environment. Volumes have been hit when the industry was caught unawares by the increase in taxes. If there is a sudden hike in prices, volumes do get affected. Given that taxes comprise nearly 60 per cent of the retail price of a cigarette stick, industry treats this as input cost. Thus, predictability helps the industry plan price increases in a calibrated way, helping it hedge the impact of increase in input costs.

Analysts believe ITC is well geared to absorb a 10 per cent increase in taxes. However, if the increase in taxes is more, there could be some impact on earnings and volume growth. Goldman Sachs expects ITC to continue to show robust year-on-year volume growth of over eight per cent in the second half of FY12, as seen in the first and second quarters of the financial year. “ITC enjoys strong pricing power, with key brands seeing retail price increases at a nine per cent CAGR over the past five years against inflation of 6.5 per cent.”

Source By Business Standard (Date:30/12/2011 Time:11:44 AM)

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