However, the recent price hikes — including other small price increases in regional brands in Q2 and Q3 — have come despite no increase in taxes. Thus, this will improve realisation and operating profit margin, provided there is no tax increase going ahead, besides offsetting the increase in tobacco costs.
Roughly, a 2 per cent price hike will result in about a 4 per cent improvement in realisation. Though the higher cost of tobacco could cap benefits to an extent, some analysts estimate a double-digit growth in ITC’s cigarette business’ operating profits in the near term. During the April-December 2018 period, the cigarette business’ Ebit rose 9 per cent YoY.
An important aspect is that the price hikes are unlikely to weigh on volumes.
has been taking price hikes in some regional brands since the September 2018 quarter. Since the pricing actions are restricted to regional brands, we do not see any material impact on volumes. Further, 20 months of steady prices provide comfort on price hikes,” says Nitin Gupta, analyst at SBICAP Securities.
During April-December 2018, cigarette volumes rose close to 5 per cent against a 3 per cent fall during the same period a year ago. The past trends suggest that single-digit price hikes usually do not impact volumes significantly.
The stock is currently trading at 25 times its FY20 estimated earnings.