On Monday, after Chandigarh, Maharashtra became the second state to ban sale of loose cigarettes.
Ban on sale of loose cigarettes will impact local vendors and government more than the manufacturers, Suruchi Jain, Equity Research Analyst, Morningstar Investment told CNBC-TV18.
On Monday, Maharashtra government announced a ban on sale of loose cigarette.
"The ban will impact branded cigarette sales in the entire industry and ITC has the largest market share," Jain said, adding, "so, it will get significantly impacted."
Implementation of the ban will decide the actual impact on ITC and the entire industry, she said.
“One needs to note that this does hurt the government as well because the government collects significant tax from branded cigarettes and by curbing their volumes and business, they are actually hurting their tax revenues,” said Jain.
For ITC, volumes are already negative, but Jain expects it to grow in the later half of the year.
ITC might also look at alternative options to increase sales volume, said Jain.
Transcript of Suruchi Jain's interview with CNBC-TV18.
Reema: What kind of an impact will this move by the state of Maharashtra have on ITC’s volumes as well as perhaps in the profitability as well?
A: Similar to higher excise taxes, which mainly impact branded cigarettes, the sale of loose cigarettes will also impact branded cigarette sales in the entire industry and as such ITC has the largest market share. So, it will get significantly impacted. Volumes will come under pressure significantly but it all depends on how implementable this is.
So, while the government of Maharashtra has announced that it will be a punishable offence with imprisonment as well as a monetary penalty it all depends on how deterred are vendors from selling loose cigarettes and how easily implementable it will be on the ground.
Sonia: What is exactly the contribution that ITC gets from the sale of loose cigarettes in its overall revenues?
A: For the industry, we know that 70 percent of all branded cigarette sales are in loose form and I would imagine it would be a similar one for ITC given that ITC accounts for nearly 80 percent of all branded sales. So, we would assume it would be similar for the overall industry.
Sonia: If it is implemented in its entirety then how much do you think the dip in the volumes could be for ITC?
A: The volumes are already trending in the negative and what we are seeing is actually at the manufacturers end. So, they have made a punishable offence both at the manufacturer as well as the vendor.
Manufacture actually doesn’t sell loose cigarettes, it is mainly the vendors. So it is at the vendor end that we will have to really see how implementable it is. It is hard to say exactly what the decline in volume will be, we don’t even know whether it will be properly implemented and so far only one or two states have really announced this. So, we will wait and watch and see how much further pressure this will put.
One needs to note that this does hurt the government as well because the government collects significant tax from branded cigarettes and by curbing their volumes and curbing their business they are actually hurting their tax revenues as well and what it does do is it benefits the illicit trade.
So, it benefits the non-branded bidi sales which are actually one could say more harmful because they are not filtered and those are very hard to curb on.
Reema: What happens to the stock from here on? It has already lost close to about a percent and half to two. Do you see more downside and ITC purely based on this particular event?
A: Short term definitely things are looking quite bleak given that the volume uptick will be the main trigger for the stock to really move up. Our fair value on the stock continues to be at Rs 406 and as we hope that volumes will uptick later in the year when all these implementations sort of die down and business is back to usual versus all the government policy changes.
Sonia: But it could be very easy for ITC to sort of work around this whole announcement just by changing its packaging strategy and coming out with smaller cigarette packets with one and two cigarettes in a packet?
A: Absolutely, that is also definitely possible and that is why we are saying that we haven’t factored in a change in our volume growth as yet because there are workarounds possible for the cigarette manufactures to ensure that their vendors are not punished and to make sure by working together there is nothing stopping them from doing that.The Great Diwali Discount!
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