ITC has test launched 64mm cigarettes (Capstan at INR2.0/stick, Gold Flake at INR2.5/stick) in UP and Bihar; an expected move due to the ~40% tax differential between 64mm and 69mm categories. Though we perceive this as positive, we expect limited volumes (1-2% of total cigarette volumes) due to high price differential (INR2/stick against INR1/stick) with smuggled contraband cigarettes (~INR18bn market; ~10% of industry). Competitors like VST are also testing this category in Chhattisgarh and Andhra Pradesh
ITC’s 64mm range is priced at a significant discount to its 69mm cigarettes (available at INR3.5 and INR4.0), though at a premium to illegal cigarettes (INR1/stick). As consumer loyalty in cigarette consumption is high, we expect limited cannibalisation impact. We expect market share gain from illegal cigarettes due to ITC’s superior distribution network; some step up from bidis to 64mm will also drive this category’s growth.
