Union budget 2012-13: Cigarette prices to go up; no impact in stock price

KOLKATA: Prices of filter cigarette can increase by 8-10%, which analysts feel would only have a short-term impact on cigarette sales of leading companies like ITC Ltd and Godfrey Philips.

The Budget on Friday announced a proposal to increase basic excise duty on cigarettes of more than 65mm length by adding an ad valorem component of 10% to the existing specific rates. The ad valorem duty would be chargeable on 50% of the retail sales price declared on the pack.

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The market, however, did not adversely react to the tax increase. Share of ITC Ltd rose by 3.65% on Friday’s trading at the Bombay Stock Exchange, while stock of Godfrey Phillips India too increased by 2.98%.

Analysts attributed the positive performance of tobacco companies in the stock market to market expectations of hike in taxation.

"The market was expecting 12-15% increases in taxes, so there is no surprise. The companies will have to increase prices to mitigate the hike. While there may be a short-term lull in sales, but analysis of past trend shows demand may bounce back in a quarter or two," says Sharekhan analyst Kaustubh Pawaskar.

An ITC Ltd spokesman said the company will be able to evaluate the impact only after studying the Finance Bill.

Snubbing the price hike, industry body The Tobacco Institute of India (TII) director Udayan Lall said the increase in cigarette excise duties will substantially aggravate the tax arbitrage between duty paid and duty evaded cigarettes.

"This huge arbitrage will, unfortunately, incentivise the rapidly growing trade of excise evaded and smuggled cigarettes. According to Euromonitor International, illegal cigarettes in India account for 16% of the industry, having grown by 58% between 2004 & 2009," says Mr Lall.

TII feels the higher cigarette excise duties will adversely affect the earnings and livelihoods of the cigarette leaf tobacco farmers who have been going through bad times on account of depressed international prices.

The Budget has also proposed hike in prices of pan masala, gutkha, chewing tobacco, unmanufactured tobacco, bidis and zarda scented tobacco.