 "ITC: Fear of regulatory risks exaggerated")
Regulatory risks for ITC remain elevated, despite the change of guard at the health ministry in New Delhi. But the market has shrugged it off, a day after the ministry accepted an expert panel's recommendation on prohibiting sale of loose cigarettes, among other measures, to curb consumption of tobacco products. A day after the announcement, shares of ITC rose 2.1 per cent, as the Street feels implementing such proposals couldn't be easy.
If implemented, these would be negative for listed cigarette manufacturers like ITC. About 75 per cent of ITC cigarettes, claim analysts, are sold in the loose format. However, a majority also believe enforcing a ban on loose sale and an age limit on sale of tobacco products could prove a challenge. According to Kotak Institutional Equities, effective implementation of such regulations can have a knee-jerk impact on ITC's cigarette volumes but it is difficult to predict.
Motilal Oswal Securities says, "We believe the implementation a ban on loose sticks and raising the minimum legal age will be difficult, as cigarettes are sold through 7-7.5 million outlets. The record of authorities in implementing the ban on gutkha, chewing tobacco in various states, as indeed the ban on smoking in public places, has been patchy, according to industry channel checks."
Even if implemented, analysts believe manufacturers can come out with smaller pack sizes, with 2/3/4 cigarettes. JM Financial believes it is possible for companies to introduce lower unit packs (packs of two sticks or five sticks) that are in full compliance with the required norms with respect to statutory/pictorial health warnings.
Finally, the stock currently factors in the regulatory risks faced by the sector. The stock currently trades at a 30 per cent discount to the price/earnings ratio of the fast-moving consumer goods sector. ITC trades at 25 times PE ratio on a one-year forward basis, relatively cheap compared to any other consumer stock in the category. JM Financial believes the risk-reward on the stock is favourable at this stage, as the brokerage sees insignificant risk to business operations even if the proposals of the panel are finally accepted.
If implemented, these would be negative for listed cigarette manufacturers like ITC. About 75 per cent of ITC cigarettes, claim analysts, are sold in the loose format. However, a majority also believe enforcing a ban on loose sale and an age limit on sale of tobacco products could prove a challenge. According to Kotak Institutional Equities, effective implementation of such regulations can have a knee-jerk impact on ITC's cigarette volumes but it is difficult to predict.
Motilal Oswal Securities says, "We believe the implementation a ban on loose sticks and raising the minimum legal age will be difficult, as cigarettes are sold through 7-7.5 million outlets. The record of authorities in implementing the ban on gutkha, chewing tobacco in various states, as indeed the ban on smoking in public places, has been patchy, according to industry channel checks."
Even if implemented, analysts believe manufacturers can come out with smaller pack sizes, with 2/3/4 cigarettes. JM Financial believes it is possible for companies to introduce lower unit packs (packs of two sticks or five sticks) that are in full compliance with the required norms with respect to statutory/pictorial health warnings.
Finally, the stock currently factors in the regulatory risks faced by the sector. The stock currently trades at a 30 per cent discount to the price/earnings ratio of the fast-moving consumer goods sector. ITC trades at 25 times PE ratio on a one-year forward basis, relatively cheap compared to any other consumer stock in the category. JM Financial believes the risk-reward on the stock is favourable at this stage, as the brokerage sees insignificant risk to business operations even if the proposals of the panel are finally accepted.