ITC stock plunges: Main business vulnerable to threats of regulation

ITC's stock closed over 3 per cent today on back of Australia banning logos on cigarette packs depicts how vulnerable is the company's main business (and also its cash cow) to the threats of regulation.

Dismissing a challenge by British American Tobacco (BAT), Imperial Tobacco, Philip Morris and Japan Tobacco International (JTI), Australia's High Court paved way for a tough anti-tobacco marketing legislation banning logos of companies on the cigarette packs.

Starting December, cigarettes and tobacco products in the country would be sold in plain olive green packets with graphic health warnings. Developed nations eager to discourage smoking would be tempted to invoke a similar legislation making the Australian law a precedent for similar regulations elsewhere in the world.

While a similar action is not being mulled or expected in India in the immediate term - the company cannot ignore the rising threat of regulations against tobacco and smoking and increased taxation on tobacco products in the country.

Though ITC has put in place a strategy to diversify into other segments like FMCG staples, hotels, paper & paperboard, agriculture and IT - it still has to meaningfully make a difference to the company's earnings.

All the non-tobacco segments contribute only one-fifth to the company's bottomline, despite earning over 60% of the company's revenues. This, despite the fact that, the company has chalked out this diversification for more than a decade now.

Tobacco continues to be the company's bread and butter and an area that is being threatened by regulation and heavy taxation across the world.No wonder investors feel jittery every time a new anti-tobacco regulation is formulated.