Australian ruling on cigarette packages burns ITC, FMCG stocks

MUMBAI: Shares of tobacco-to-hospitality major ITC fell 3.6% to 258 on Thursday after the Australian Supreme Court on Wednesday banned logos on cigarette packages in the country and said that starting December 1, cigarettes will be sold only in olive green packets with graphic health warnings.

The move triggered a selloff in shares of cigarette manufacturers worldwide, including those of ITC, which is India's largest cigarette maker.

"Today's share price fall was a sentimental impact of the ruling in Australia. Even as the Indian government is making policies to curb cigarette consumption, laws such as that in Australia would be difficult to implement considering the amount of smuggled cigarettes sold here," said Kaustubh Pawaskar, an analyst at Sharekhan.

However, analysts said that a long-term impact of the Australian ruling on companies like ITC could not be ruled out.

"Escalating regulatory concerns would lead to a de-rating of tobacco companies worldwide, which, in turn, would rub off on ITC. We believe it is a precursor to the pain that the global industry and, consequently, ITC are likely to face," analysts Nikhil Vora and Harit Kapoor of IDFC Securities said in the note, two days after downgrading the stock to 'underperform'. The Sensex fell 0.4% to 17,651. The BSE FMCG index fell 2% following the fall in ITC shares.

Analysts said ITC has little room to disappoint on the earnings front as the recent rally in its shares has made it one of the most expensive consumer goods stock. ITC shares have risen 30% so far this year compared to the 14% gain for the Sensex.

Most FMCG stocks have hit their all-time highs recently despite headwinds like truant monsoon, high inflation, economic slowdown and slowing discretionary spends. With the Indian meteorological department expecting monsoon to improve and be only 15% below normal during June-September, lower than the 22% deficit expected earlier, interest in FMCG stocks may continue to be alive.

Over the last 12 months to June, FIIs have increased ownership across FMCG companies except Marico, Emami, Jyothy Laboratories, Dabur, Zydus Wellness and United Spirits, while domestic institutional investors have decreased their exposure to the sector (except Marico, Emami, GSK Consumer Healthcare, Dabur and United Spirits), as per a recent report by stock broker AC Choksi.