Budget 2016 –ITC’s Expectations for its Cigarette segment.



{This was a report made by me under my internship trainer N Ravindranathan in 2016 Feb.It was about taxation impact on ITC and its share price movements}

ITC Limited is an Indian conglomerate with five diversified business, FMCG,  Hotels,Paperboard,Agri business and Information Technoligy.ITC   is globally the most successful cigarette company with an EBIT margin close to 67 %. In last 10 years studying in the context of ITC we witnessed that tax burden on Cigarettes has continued to increase. Government has been aggressively increasing the excise duties maintaining its stance on emphasis on public health .During the last 4 years it’s excise rate hike has been registering a CAGR rate of > 15 %.In coming budget it is expected that previous years trend might continue.ITC would be expecting a single growth rate or no growth rate, as it would allow it to raise its price by 12-15 %, thus enabling it to earn growth rates of 15 % in earnings .While forecast of hike in excise duties close to 15 % will be troublesome. Cigarettes continue to see the most punitive policy.

Other than this there are concerns about anti tobacco measures taken by different states like,Punjab,UP,where ban has been imposed on selling loose cigarettes, VAT hike, Pictorial warnings to cover 85 % of packing has to be implemented from April 2016.Now at all India level cigarettes pack will have to also mention tar and nicotine content.

Despite this, ITC has managed to raise its net sales as compared to increase in taxes. One reason for this is the real income increase of consumer has been more as compared to the hikes in tax rates. So the affordability level of consumers has not gone down. ITC has also benefitted from the multi layered tax structure for different lengths of cigarettes ITC’s.

Cigarettes are sold in India in 6 different tiered structures. It was 7 till 2014.ITC’s growth revenues from micros cigarettes 64 mm have increased from around 5 % in Fiscal 2013 to nearly 20 % in Fiscal 2016.While revenue generation from 64mm-69mm has gone down to nearly 60 % in Fiscal 2016 as compared to nearly 75 % in Fiscal 2013.ITC benefitted since when the excise duty hike was very heavy on 64-69 mm section. It curtailed the length and brought in tax tier of cigarettes less than 64 mm in length . Micros volume has seen rapid growth during the past three years. For ITC an important aspect will be to watch out for any probable tax hike for micros this year 64mm . Presence of 6 tiered regimes for taxation of cigarettes also enables ITC to hold on with its market base and profits. Although 64mm has seen much sharper tax hikes.



Price per 1000 rs and impact of tax hike can be shown in tabular form in last 5 years.



As of steady hike in customs duties for cigarettes, the burden was shifted to consumers. So a consistent increase has been seen in the price per unit of cigarette.There has been significant impact registered on the cigarettes volumes which has been contracting 7-9 %.It has been noted that the Fiscal 2016 volume will be likely around Fiscal 2006 of nearly 75 billion sticks.

Trends in ITC’s portfolio mix

64 mm  segment has been growing rapidly and has ITC to maintain its consumer base



The gap between 64 mm and 69 mm has been reduced to 32 % from existing 110 % in FY 14 ,and if there is another rise in 64 mm ,its relevance will be under threat.

Trends in taxes on 64 mm vs 69 mm

Impact on stock prices during budget

Due to a excise hikes done during the budgets a stock prices of ITC showed volatility at times immediately before the day of budget. This can be shown that during the year 2015 immediately after the budgetary announcements of 25 % hike in cigarettes of length less than 65mm and 15 % for cigarettes in length exceeding 65 mm. The stock prices which were trading at 393 a day before the budgetary announcements immediately fell to 363 next day of the budget.

ITC has typically underperformed during the days before the budget .ITC stock has given negative to flat returns nearly 9 times over the past 13 years before the run up to the budget. It had been noticed that positive results were generated in 10 out of 13 times post budget. ITC’s stock performance has been better after the budget announcements have been done and uncertainties related to tax hike is over. Other major reason has been that strong pricing growth did offset weak volumes and lead to higher profit margins. So the stock continued to attain the faith of shareholders.

Other than this we saw that over the last 10 years 6 times the stock price fell before the budget in anticipation of probable excise hike. Barring 2013 and 2015 all years witnessed a growth in stock prices immediately after the budget declaration.

ITC EBIT margins are at an all time high and company is the most profitable cigarette company in the world.

10 year average stock price performance(in percentage)


Rise of illicit cigarette industry.

Factors such as rise of illicit markets have been getting worrying for the cigarette industry. India has emerged as one of largest markets for illegal markets in the world. It is estimated that illegal trade of tax evaded and smuggled cigarettes is 1/5 of overall cigarettes volume. Share of legal cigarettes in the overall basket of tobacco consumption has declined from 21 % at one’s existing level to 12 % today. In India, nearly 68-70 % of tobacco consumption escapes taxes as unorganised sector does not face regulatory oversight. It is estimated that revenue losses due to this may be as high as US $ 1 bn(6780 crores).However this is to be noted that despite sharp decline ,ITC’s excise duty payments to government have not declined over several years and same has been the case for the entire industry. But the declines in volume have been significant and a high price of cigarettes has been registered.

Selling price of illicit cigarette is even lesser than the tax


Study does show that government has not been losing on revenues as of its aggressive tax hikes and tax collection from cigarettes will still be on higher side. Trends in ITC’s excise duty payments.


Study indicates that there is overall need to increase excise on all tobacco products as government is losing on revenues .If the unorganised sector of tobacco production can be brought under taxation, it will be beneficial .ITC has been shifting its focus and has diversified its sales as total composition of cigarettes in revenue generation has declined from the levels of 70 % a decade ago to 62 % now. Cigarette earning growth has been at historic low.ITC will be watching out the budgetary announcements as tracking whether any hike around 15 % is done or no hike is done.

Trends before budget on movement of stock prices

Year Before 6 month Before 3 mon Before 2 mon Before 1 mon Day before
2005 -19.55% -0.31% 1.85% 8.19% -0.54%
2006 888.37% -19.19% -19.77% -9.88% -3.49%
2007 5.26% 4.68% 3.51% 0.58% -3.51%
2008 -17.33% -7.92% 1.49% -0.50% -0.50%
2009 -24.89% -20.25% -22.78% 1.27% 1.27%
2010 2.91% 12.51% 10.16% 7.26% 6.35%
2011 -4.62% -0.24% 1.30% -0.50% -7.69%


2012 -4.62% -0.24% 1.30% -0.50% -7.69%
2013 -9.04% 1.09% -1.83% 2.02% 0.07%
2014 -7.38% -1.79% -0.53% 2.21% -0.92%
2015 -1.67% 0.50% 2.35% -0.33% 8.76%

Trends after budget in movement of stock prices.

Year Day after I month later 2 month later 3 month later 6 month later
2005 3.32% 1.62% 12.13% 23.57% 31.38%
2006 0.58% 11.63% 16.86% 3.49% 31.38%
2007 0.58% -16.37% -6.43% -2.92% -2.34%
2008 0.00% 1.98% 4.46% 9.90% -9.41%
2009 2.11% -0.42% -1.27% 9.28%  
2010 3.77% 13.84% 15.13% 15.87% -29.43%
2011 2.37% 5.74% 13.52% 11.80% 19.50%


2012 1.78% 11.52% 5.16% 14.74% 19.52%
2013 -1.63% 4.97% 10.13% 15.33% 1.15%
2014 1.88% 12.69% 6.68% 7.05% 7.14%
2015 -5.08% -9.35% -6.59% -11.04% -12.30%


Yellow portion shows the trends of stock in run up to budget while green portion shows hike in price post budget. After tax uncertainties have eased out.

Impact on net sales in cigarette segment .over the Fiscal years.



2008 2009 2010 2011 2012




14326 15754 18111 19827 22232
NET SALES 6634 7556 9321 10673 12954
EXCISE DUTIES,TAX 7692 8198 8790 9154 9278
% EXCISE DUTIES,TAX 53.69% 52.04% 48.53% 46.17% 41.73%
NET SALES GROWTH% 113.90% 123.36%




















2013 2014 2015
29076 30452


15546 16804




























Harsh Vardhan Pathak

Msc Economics

Doon University


Author: Brink of Economic Thoughts

Messiness generates new thinking, new ideas and new innovation. Brink of Economic thoughts is all about the bonanza of opportunities around us, a infant steps towards a better world, with better understanding.

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