Cigarette company: Promises price increase with high volume

Shares of cigarette companies have risen in the past month, with three top cigarette makers, ITC, Godfrey Phillips and VST Industries, reaching record highs. All three stocks have posted strong returns over the past year, significantly surpassing the benchmark Sensex, helped by favorable taxation and rising prices of competing tobacco products.

Unlike last year, the central government did not increase excise duty on cigarettes in this fiscal year’s budget, although the states have increased the value added tax (VAT) in various ways. While northern states like Rajasthan have significantly increased VAT on cigarettes, all the southern states have protected the sector from huge growth. In contrast, competing tobacco products such as ‘pan masala’ and chewed tobacco have witnessed higher spending in the form of higher taxes and higher raw material prices.

Also, the price of tobacco has remained modest compared to the high price of ‘tendu’ leaves which are used in making ‘bidi’. The cigarette industry has financed bidis by increasing the price of bidis through competitively priced and micro-filtered cigarettes to entice smokers for cheaper cigarettes. Also, contrary to its earlier plan, the government has decided to issue less bloody pictorial warnings on cigarette packets, which has helped the sentiment in stocks.

For the quarter ended June, VST Industries’ net profit grew 90% year-over-year. The ITC, which has not yet announced its first-quarter earnings, expects cigarette prices to rise despite rising prices for some of its products. On the upside, the rally of cigarette companies is likely to continue as all the factors seem to be positive for the sector.

Analysts expect cigarette companies to report strong revenue growth due to higher earnings, higher prices and lower costs.