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Shares of cigarette manufacturers plunged on Tuesday after the government accepted a tougher framework for the sale of tobacco, including a ban on the sale of loose cigarette sticks.
Shares of market leader ITC fell five per cent, the most in five months, and accounted for most of the decline in the benchmark Sensex and Nifty. Other tobacco firms, including Godfrey Phillips and Golden Tobacco, dropped two-eight per cent.
In a statement to the Rajya Sabha, Health Minister J P Nadda on Tuesday said his ministry had accepted the recommendations of an expert panel. The recommendations include increasing the minimum age to purchase tobacco products, bigger pictorial warnings on product labels and higher fines.
Industry players said the revenues of tobacco companies could take a hit due to the move to ban the sale of loose cigarette sticks, which account for about 70 per cent of the sales. “We expect the ban, if implemented, to be a near-term overhang on cigarette stocks...also, as the Union Budget is only three months away and stricter packaging norms will come into play from 2015-16, the waters are further muddied,” said Abneesh Roy, associate director (institutional equities-research), Edelweiss Securities.
Analysts said the actual impact would be clear once the details of the guidelines and implementation were in place. The draft note by the ministry would require Cabinet approval before implementation.
The cigarette sector contributes about Rs 30,000 crore a year in taxes to the government exchequer. Industry players said cigarette companies might come up with innovative ideas to mitigate the impact of the new norms. “If implemented seriously, cigarette players are likely to launch small packs to circumvent the ban, potentially leading to ‘sachetisation’ of cigarettes,” said Roy.
ITC declined to comment on the issue.
“The proposed ban on the sale of loose cigarettes will have a short-term negative impact on cigarette volumes. We believe implementation will be difficult in India, because seven-eight million outlets will have to be regulated very frequently and the country does not have the infrastructure to do that,” said Amar Ambani, head of research, IIFL.
Analysts said the decline in these stocks could be temporary, as the panel’s recommendation weren’t regulations yet. “The fall in the stock price was a knee-jerk reaction to the news. Even if the regulation is implemented, we do not expect a sharp fall because demand for cigarettes is unlikely to be impacted by a ban on single cigarette sales,” said Alex Mathew, head of research, Geojit BNP Paribas Financial Services.
Analysts said the selling in ITC shares on Tuesday benefited rival firm Hindustan Unilever. Shares of Hindustan Unilever rose two per cent to Rs 764.75, even as the overall market ended weak.
