ITC tries short cigarettes as taxes hit demand

Mumbai: India’s smokers are favouring cheaper options such as chewing and leaf-wrapped tobacco over cigarettes, as rising taxes prompt ITC Ltd to sell shorter sticks with lower duties.

“Earlier on, as the taxation was increased, the cigarette industry showed resilience. Now, it has suddenly begun to drop,” Yogesh Deveshwar, chairman of Asia’s third-biggest listed tobacco-seller ITC, said in an interview with Bloomberg TV India. “The tobacco consumption basket continues to grow, whereas the cigarette share continues to shrink.”

India’s government has raised taxes, required graphic warnings on packages, and barred smoking scenes in films as it seeks to reduce tobacco use and fight related illnesses that kill a million Indians annually. Duties on cigarettes have more than doubled in the past four years and there’s signs that smokers are becoming more price-conscious, according to brokerage IIFL Institutional Equities.

ITC, a major component of the S&P BSE Sensex, plunged the most in seven years on 28 February, after finance minister Arun Jaitley proposed raising duties again, this time by at least 15%.

ITC has begun to cut the size of some products to preserve margins as sales volume slumps, taking advantage of a quirk in India’s tax system that hits longer cigarettes with higher rates.

Last month, the company shortened its discount Bristol brand cigarettes to 64 millimeters (2.5 inches) from 69 millimeters, lowering the tax without cutting the retail price, IIFL analysts Percy Pathanki and Avi Mehta said in a 26 March report. “If successful, this experiment could pave the way for some more brands transitioning similarly over a few years,” they wrote.

Manufacturers now pay a duty of Rs.1.44 on each cigarette 65 millimeters or shorter. The rate is Rs.1.9, or 32% higher, for 65 to 70 millimeters cigarettes.

Cigarettes currently account for 12% of all tobacco consumed in India, half the rate two decades ago, said Deveshwar, who joined ITC in 1968. He had a stint as chairman of Air India between 1991 and 1994.

The nation consumes nearly 10 times as many bidis, a cheaper form of hand-rolled cigarettes, according to a World Health Organization (WHO) report in August. Yet cigarettes provide 85% of tobacco taxes, data from the Central Board of Excise and Customs show.

A 10-stick pack of budget cigarettes retails for about Rs.55 in Mumbai, while those of premium brands such as Philip Morris International Inc.’s Marlboro cost Rs.100. The same size pack of bidis costs between Rs.6 and Rs.10.

The tax on bidis make up about 9% of the retail price, compared with 38% for cigarettes, according to a 2010 study funded by Bloomberg Philanthropies and the Bill and Melinda Gates Foundation. Bloomberg Philanthropies was founded by Michael Bloomberg, also founder and majority shareholder of Bloomberg LP, the parent company of Bloomberg News.

ITC tried to reduce its reliance on cigarettes over the past decade, diversifying into other consumer products such as soaps and snacks, without major impact. Cigarettes accounted for 62% of ITC’s sales in the year ending in March 2014, down from 68% in the company’s 2005 fiscal year. Operating profit contributed 84%, down from 86%.

The government’s tax revenue from cigarettes has also seen a slight decline. For the eight months ending in November, cigarettes taxes collected fell 0.02%, according to most recent data from the excise board.

Deveshwar said reduced tax revenue from cigarettes would hurt India’s economy because public finances have grown reliant on the funding source.

In July, the country’s then health minister, Harsh Vardhan, said in a letter to his finance ministry counterpart that raising taxes by Rs.2 per cigarette in the Union budget would help India by reducing rates of cancer and heart disease. Tobacco-related ailments cost India about Rs.1.05 trillion in 2011, according to a health ministry study released last year. That dwarfs the Rs.17,800 crore in tobacco taxes raised for the year ending in March 2014.