Cigarette companies surge on tobacco bill reports
With proposed ban on sale of loose cigarettes shelved for now, risk of sales falling has reduced: Experts.
By Prashant Mahesh, ET Bureau | Updated:
MUMBAI: Shares of cigarette companies such as ITC, Godfrey Phillips and VST Industries surged on Thursday following media reports that a health ministry proposal to ban sale of loose cigarettes is likely to be put on hold.
ITC jumped 5.5% to Rs 382.75 after touching a six-month high earlier in the day.
Godfrey Phillips advanced 5% to end atRs 618.75, while VST Industries gained 2.56% to end at Rs 1,917.55. These stocks have been under pressure since November 25 when the health ministry made the proposal. Since then, ITC has fallen about 4% Godfrey Phillips has declined 10%, while VST has been almost unchanged.
The government has been forced to rethink the proposal following objections from farmers’ associations, which felt the step was drastic. According to analysts, the tobacco industry directly as well as indirectly employs as much as 35-37-million people. The proposed ban was mooted by the Union health ministry to curb smoking.
“With the proposal to ban sale of loose cigarettes being off for the time being, the risk of cigarette sales falling or users shifting to other products has reduced.
This will benefit cigarette companies, which explains the surge in stock prices,” said Alok Ranjan, portfolio manager, Way2Wealth. “Legal cigarettes account for less than 12% of tobacco consumed in India due to high taxation.“
Analysts said cigarette companies in India have been vulnerable to tax increases for many years, resulting in decline in volume growth. “While perpetually low volume growth for the industry could pose a challenge in the long term, regulatory changes that restrict pricing power and/or product mix trends will have the biggest implications for ITC’s earnings,” said analysts at Jefferies in a recent research note. “Cigarette taxation has curtailed consumption and increasing regulations may place further constraints. Perpetually low volume growth is a challenge in the long term, but is a weak determinant of profitability relative to pricing/mix,” the note said.
ITC jumped 5.5% to Rs 382.75 after touching a six-month high earlier in the day.
Godfrey Phillips advanced 5% to end atRs 618.75, while VST Industries gained 2.56% to end at Rs 1,917.55. These stocks have been under pressure since November 25 when the health ministry made the proposal. Since then, ITC has fallen about 4% Godfrey Phillips has declined 10%, while VST has been almost unchanged.
The government has been forced to rethink the proposal following objections from farmers’ associations, which felt the step was drastic. According to analysts, the tobacco industry directly as well as indirectly employs as much as 35-37-million people. The proposed ban was mooted by the Union health ministry to curb smoking.
“With the proposal to ban sale of loose cigarettes being off for the time being, the risk of cigarette sales falling or users shifting to other products has reduced.
This will benefit cigarette companies, which explains the surge in stock prices,” said Alok Ranjan, portfolio manager, Way2Wealth. “Legal cigarettes account for less than 12% of tobacco consumed in India due to high taxation.“
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Analysts said cigarette companies in India have been vulnerable to tax increases for many years, resulting in decline in volume growth. “While perpetually low volume growth for the industry could pose a challenge in the long term, regulatory changes that restrict pricing power and/or product mix trends will have the biggest implications for ITC’s earnings,” said analysts at Jefferies in a recent research note. “Cigarette taxation has curtailed consumption and increasing regulations may place further constraints. Perpetually low volume growth is a challenge in the long term, but is a weak determinant of profitability relative to pricing/mix,” the note said.
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