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Along with the three major cigarette makers, cigarette companies’ shares have risen over the past month. ITCgodfrey PHILIPS And VST Industries going to record highs. Helped by favorable taxation and increased cost of competing tobacco products, all three stocks have posted strong returns over the past year, outperforming the benchmark Sensex.
Unlike previous years, the central government has not increased the excise duty on cigarettes in this fiscal year’s budget, though states have separately raised value-added tax (VAT). Whereas in northern states like Rajasthan there has been a considerable increase tub On cigarettes, all southern states have spared the sector a major increase. In contrast, competing tobacco products such as ‘pan masala’ and chewing tobacco have seen cost escalation in the form of higher taxation and increased raw material costs.
Moreover, tobacco prices remain benign compared to the higher prices of ‘tendu’ leaves used for manufacturing ‘bidi’. The cigarette industry has taken advantage of the rise in bidi prices and has attracted ‘beedi’ smokers to cheap cigarettes by offering low-cost and competitive pricing of micro-filtered cigarettes. Also, unlike its earlier plans, the government decided to issue less bloody pictorial warnings on cigarette packets, which has helped sentiment in stocks.
For the quarter ended June, VST Industries reported a 90% YoY jump in net profit. ITC, which is yet to declare its first quarter earnings, expects cigarette volumes to rise despite increase in prices of some of its products. In the future, cigarette companies are likely to continue to rally as all factors appear to be positive for the sector.
Analysts expect cigarette companies to post strong earnings growth on the back of higher volumes, increase in prices and lower expenses.
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