Cigarette makers’ shares have surged in the past month, with the three largest cigarette makers, Godfrey Philips, hitting record highs. All three stocks have delivered robust returns over the past year, significantly outperforming the benchmark Sensex, helped by favorable taxes and higher costs from competing tobacco products.

In contrast to previous years, the central government has not increased the excise tax on cigarettes in the budget for this tax, although states have increased value-added tax (VAT) in varying degrees. While northern states such as Rajasthan have significantly increased VAT on cigarettes, all southern states have spared the industry a hefty hike. In contrast, competing tobacco products such as ‘pan masala’ and chewing tobacco have witnessed cost increases in the form of higher taxes and a rise in raw material costs.

Also, tobacco prices have remained favorable compared to the higher prices of ‘tendu’ leaves used in the production of ‘beedis’. The cigarette industry has capitalized on the rise in beedi prices by discounting cheap cigarettes and microfilter cigarettes to lure ‘beedi’ smokers to cheaper cigarettes. Also, contrary to previous plans, the government has decided to place less gory warnings on cigarette packs, which boosted sentiment in the stocks.

In the quarter ended June, VST Industries reported a 90% year-over-year increase in net profit. ITC, which has not yet disclosed its first quarter earnings, is expected to have seen an increase in cigarette volumes despite price increases in some of its products. Going forward, the rally in cigarette manufacturers is likely to continue as all factors appear positive for the industry.

Analysts expect cigarette makers to report strong earnings growth as a result of higher volumes, price increases and lower costs.

This post Cigarette manufacturers: Price increases with higher volumes are promising

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