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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Govt’s price control, a plus for CTC

Govt’s price control, a plus for CTC

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1Govt’s price control, a plus for CTC Empty Govt’s price control, a plus for CTC Sun May 27, 2012 3:39 am

CSE.SAS

CSE.SAS
Global Moderator

Although the government’s control on leading tobacco firm, Ceylon Tobacco Company’s (CTC) products is seen as a hindrance given that a price increase is almost guaranteed once a year, the firm’s net revenue has been found to improve by Rs. 0.23 for every Re. 1 increase in price per stick, a recent research report has revealed. With the dominant position of CTC and the addictive nature of the products, demand graph for CTC’s products have remained more or less vertical, the report published by Arrenga Capital Research stated.

“Volume levels which were seen trending downwards have now recovered to fall back on track after 2009. CTC has proved to remain strong amid declining business to see a 5 year CAGR of 17.6% in top line mainly supported by price increases,” the 1Q2012 Earnings Review prepared by the research firm stated.

According to financials, CTC’s net profit has increased by a strong 82.9% YoY to Rs. 1,489m in 1Q2012 whilst net revenue improved by 11.5% YoY to Rs.4,498m. The gain was primarily led by the 10% increase in price cigarettes in October 2011 whilst saving in other operating expense which assisted to bring down the operating cost base by 23.7% YoY.

“The YoY increase in revenue can be justified with additional contribution flowing in after the 10% price increase of cigarettes made last year (with effect from 20.10.2011) with the comparative period excluding the LKR2.0 increment. However, volume levels for 1Q2012 had remained stagnant on a QoQ comparison,” the report highlighted.

It further noted that although falling volume levels had been a worrying element for CTC in the past increasing volume too poses a challenge now as the factory operates at a capacity of 4.5bn stick p.a and had worked to its full capacity in 2011.

“Hence, the question emerges with the ability to cater rising volume levels. The management disclosed that they would be able to manufacture 5bn sticks p.a with overtime. No plans on expansion have been intended so far though importing machinery and starting up a process over a short time phase cannot be a big challenge. Costs could be easily combated with their low gearing and rich reserves.”

“However, the management highlighted that nowhere in the globe has any cigarette manufacturer recorded a +10% growth in volumes over a year.

CTC had not involved with any capacity expansion for nearly a decade. Thus, the management believes that they could continue with the current capacity and contingencies for a surge in demand could be met by importing (which tends to be relatively cheaper) with BAT’s support,” the report further added.
http://www.nation.lk/edition/biz-news/item/6451-govt%E2%80%99s-price-control-a-plus-for-ctc.html

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