In the last week, ITC stock witnessed a heavy bout of selling. The reasons were not far to seek. The Indian government has proposed a new policy paper on the cigarette industry, which could have long term implications for the sector in general and ITC in particular. But, here is the immediate concern.
More pressure on cigarettes
The government hinted at a new bill that would impose severe restrictions on the sale and consumption of cigarettes in India. When the government made its lockdown announcement, cigarette sales took a sharp hit as loose sales were not permitted and most tobacconist shops were forced to shut down. Now the new bill plans to take restrictions to a fully different level. Here are some of the major changes expected in the new bill.
To begin, the government is planning to increase the legal smoking age from the current 18 years to 21 years of age. That may be hard to implement but it is going to lead to a lot of harassment of the general public. Secondly, the new bill is likely to put a blanket ban on sale of loose cigarettes. That means; all the tobacconist shops can only sell sealed packs. This would not only be hard to implement but is also prone to rampant misuse. Lastly, the government has also proposed to fully ban smoking in public places. This is in line with most foreign countries which have allocated specific zones for smokers at public places.
Why it is a worry for ITC
To an extent, this was not unexpected. More than 20 years back, when ITC had first run into excise issues, Deveshwar had set in motion a massive focus on non-cigarette businesses. Over the last 2 decades or so, ITC has made rapid strides in its areas of diversification like FMCG products, lifestyle products, fast foods, packaged products, agriculture, hotels, paper, packaging etc. However, one thing has not really changed and that is the dependence on the cigarettes business for its overall business profits. Even in the latest financial year, nearly 85% of the net profits of ITC still come from the cigarettes business. That is what has held back ITC’s valuations at much lower levels compared to other FMCG companies like HUL, Britannia etc.
Time for ITC Plan-B
One thing is clear; the core cigarettes business is increasingly going to be an embarrassment for ITC. Due to its brand association with cigarettes, ITC has not been able to really make any significant impact in the FMCG business despite a blank cheque and even after investing a good deal of time and management bandwidth in the new businesses. ITC has to quickly look at separating the ITC brand from other businesses and treat them as standalone businesses. ITC is rapidly losing the valuation race and if the Bill gets through, things could only get worse. It is time to act fast! ©
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