OSK Research is projecting an eight per cent drop in tobacco industry volume which will result in tobacco manufacturers experiencing an earnings decline of between five per cent and ten per cent next year.

The research house said its slightly higher natural attrition rate for tobacco consumption was mainly due to more smokers kicking the habit owing to the currently high price of cigarettes, it said in its research note today.

A steep hike in the excise duty of cigarettes, of as much as three sen per stick a week before 2011 Budget, made tobacco manufacturers revise selling price by more than the quantum of duty increase in order to pass on the cost to consumers.

'In view of that, we expect the sector to see higher selling prices in downtrading to value-for-money brands from premium brands, a greater incidence of illicit trade and a greater likelihood of brand switching next year.

'We think the resulting higher selling prices of a pack of cigarettes, at RM10, would curb the consumption and further encourage the proliferation of illicit cigarettes next year.

'Keeping our bearish view, we maintain our underweight recommendation for the sector,' OSK added. -- BERNAMA