PMCR: April excise tax hike will fully materialize since December

Tobacco producers have revealed prices that will be charged for cigarettes since December 2006. In large majority of price categories excise tax will be fully shifted on to consumers and average price per pack will increase by CZK 6. Start – which is already the most popular brand with 14% market share – will be one of those brands where the price increase will be partially absorbed by PMCR and the pack will increase by only CZK 3. In addition PMCR has still not revealed price for its premium brand Marlboro. In the lower price segment PMCR opted for two-step hike. First one can be visible at the point of sales at these days and next step will be similarly as with other brands since December.

Our view:
Increase in retail prices is in line with our projections that PMCR will almost fully shift price increase to customers and thus would be able to retain its margins. EBITDA margin in 1H06 was 35.6%. As we can see excise tax will materialize only in 8 months. This is more than period for which PMCR can make inventories in some most popular brands. Thus some brands will be subsidized for short period of time which can have certain negative effect on financials; however it helps PMCR to keep its market share and not to loose price sensitive customers. The fact that PMCR announced retail prices is a signal for possible softening of price war among tobacco producers which lead to significant contraction of PMCR market share in past years. So we see this news as positive.