The cigarette industry is going through a critical period as ITC and Godfrey Phillips have had to significantly increase prices from February onwards, on account of higher excise duty and steep GST enforced by the government. The price hike has weighed on ITC shares, which have fallen 5% since the start of February and more than 15% since the turn of the year.
Amid price hikes, Morgan Stanley has come out with a note on ITC, suggesting that the company has issued a 20-40% price increase across different categories of cigarettes, with more premium cigarettes attracting a higher price hike.
As these price hikes hit the market, Morgan Stanley notes that ITC is looking to protect volumes through the introduction of shorter-length cigarettes, which usually attract lower taxes. Channel checks done by NDTV Profit indicate that ITC may come up with shorter length cigarettes that resemble popular products like Classic Ice Burst.
The brokerage firm adds that consumer acceptance of higher prices will be key to the company's ability to pursue further pricing actions, with the full impact of the tax increases likely to become more visible in the first half of FY27.
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ITC's current strategy is to take a staggered approach towards price increases while minimising the impact of volumes and market share. Morgan Stanley believes this is a positive approach and is a better way to navigate the sensitive pricing environment in the cigarette space.
However, it may lead to a greater impact on near-term earnings, and the company may have to wait a bit longer to fully realise the higher prices.
Overall, Morgan Stanley has maintained an 'equal-weight' rating on ITC with a target price of Rs 346, which suggests a 13% upside from current levels.
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