The government will increase cigarette excise taxes by an average of 12.5 percent in February of next year.

“The majority of the companies’ sales volume comes from machine-made clove cigarettes, including those of [publicly listed cigarette makers] PT HM Sampoerna and PT Gudang Garam,” Mirae Asset Sekuritas analyst Christine Natasya wrote in a research note on Thursday.

Finance Minister Sri Mulyani Indrawati announced on Thursday that the tariff hike was only applicable to machine made clove cigarettes and machine-made white cigarettes. The excise tax on hand-rolled cigarettes would remain unchanged to protect the industry as it employed a large number of workers.

The move aimed to balance public health and the economy so that workers and farmers who had already been affected by the COVID-19 pandemic would not suffer further, she said as reported by kompas.com.

HM Sampoerna spokesperson Elvira Lianita said on Friday the company was “still studying the excise policy as it was just announced, and the Finance Ministry has yet to issue a regulation on the matter”.

HM Sampoerna shares, traded under the code HMSP on the Indonesia Stock Exchange (IDX), were up 4.5 percent on Monday after plunging 6.89 percent on Friday. The IDX’s main gauge, the Jakarta Composite Index (JCI), added 1.25 percent on Monday. Shares of HM Sampoerna are down 22.62 percent this year.

Gudang Garam’s stocks (GGRM) gained 3.87 percent on Monday morning after falling by 6.61 percent on Friday. The stocks have lost almost 19 percent of their value since the beginning of the year.

The shares of some smaller cigarette makers listed on the bourse, including PT Wismilak Inti Makmur (WIIM) and PT Bentoel International Investama (RMBA), also rebounded on Monday morning after recording a more than 1 percent decline on Friday.

Although the hike was lower than last year’s raise of 23 percent, Christine said the figure was higher than her average assumption of 10 percent, stoking negative sentiment for HM Sampoerna and Gudang Garam as they would need to increase cigarette prices next year.

She expected the companies to experience another margin contraction and sales volume decline in 2021. HM Sampoerna’s net profit margin was 8.8 percent in the third quarter of this year, lower than the 12.8 percent recorded in the same period in 2019, while Gudang Garam’s net profit margin dropped to 6.1 percent from 10.2 percent in the corresponding period last year.

HM Sampoerna’s net sales had declined 12.55 percent year-on-year to Rp 67.78 trillion (US$4.82 billion) as of September while its net profit had slumped 32 percent yoy to Rp 6.91 trillion.

Gudang Garam reported a similar decline. The company’s net profit plunged almost 22 percent yoy as of September to Rp 5.65 trillion, despite a 2 percent increase in revenue, as its costs swelled.

Cigarette makers also expected to face challenges from weaker purchasing power, said Christine.

“About 28 provinces in Indonesia decided to not increase the minimum wage in 2021, which should dampen the purchasing power of middle-to-lower-income consumers,” she wrote.

Similarly, Samuel Sekuritas analyst Suria Dharma told The Jakarta Post on Friday that the increase in the excise tax would continue to tighten cigarette makers’ margins as the excise accounted for about 70 percent of the price of cigarettes.

“Cigarette companies have no choice but to raise their selling price, and the competition will cause their margins to narrow,” he said.

“We expect the cigarette industry’s sales volume to decline by around 5 to 6 percent next year,” Suria said, adding that the decline would be even deeper for HM Sampoerna and Gudang Garam, as the majority of both companies’ sales were machine-made cigarettes.

HM Sampoerna’s hand-rolled cigarettes account for only about 24 percent of its sales, while Gudang Garam’s constitute to about 9 percent of its sales, he added.

Suria said the companies’ strategies for next year would determine their financial performance and market share.

“They will have to lower their prices if they want to maintain their market share to prevent their customers from turning away from their products, but this will affect their performance next year,” he said.