Health Ministry of India has drafted proposal to increase the smoking (legal) age from 18 to 21 years, ban sales of loose cigarettes, do away with designated smoking rooms at airports and restaurants and increase penalties for flouting ‘no public smoking’ rules to curb smoking. Analysts believe this news will affect the share prices of cigarette industry negatively.
“So on the face of it, this news will have negative sentiments for the entire cigarette industry including major like ITC, Godfrey and VST. However, as done in the past, in the long run companies will try to reinvent its business offering adhering to guidelines in our view. We suspect if the draft paper becomes a law it would add further woes to the sector,” says Centrum Equity Research.
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The brokerage maintains its buy rating on ITC with a target price of ₹353, an upside of 74% from the current market price. The brokerage believes, ITC’s renewed focus on maintaining cigarette market share, tailwinds for FMCG foods business, strong FCF, high dividend yield and compelling valuations make it more attractive for long term investors.
ITC share is down 13% in the last one year. However the hare has soared 21% in the lat three months.
Key risks are sharp increase in any form of taxation.
In the past, since 2003, with enactment of COTPA (cigarettes and other tobacco product act) under WHO guidelines the govt. has implemented various measures to cut tobacco consumption such as pictorial warnings, ban in public smoking, restricting entry of shops within 500mt radius of school, colleges. Further it has resorted sharp taxation in last five years for cigarette segment to cut smoking by the younger generation, as they become unaffordable, this has resulted in growth of illicit cigarettes and thereby govt. is losing the tax revenue.
In addition, as per GATS-2 survey conducted by WHO in 2017, definitely the smoking population has come down, yet there is no significant change in overall tobacco consumption in the country which could be a cause of concern for the Health ministry at this stage.
“In these circumstances we believe the intention of the govt. is driven by WHO guidelines, yet implementation and execution could be a big challenge. To illustrate, recently Maharashtra govt. (in its renewed focus) said to ban sale of loose cigarettes within the state, whilst on ground connect with channel partners suggest the local authorities still grappling to implement strictly. Further, the trade informed us that they have no mechanism to verify the legal age of its consumer, neither they are equipped with any such data, hence it may not control selling loose cigarettes in our view,” says Centrum Equity Research
Furthermore, the cigarette industry already experimenting offering a pack of 5 cigarettes in some select geographies, and if it becomes a rule it would be rolled out all India.