The Hindu Business Line : Tobacco stocks still weak on Budget blues

Kolkata, March 25 Cigarette stocks remarkably did not participate in the general upward movement on Tuesday as the tax blow continued to drag them downwards.

According to analysts, apart from the Budget blues on non-filtered cigarettes, the introduction of pictorial warning, which may come up during the first quarter of 2008-09, have raised apprehension of substantial fall in revenue for the manufacturers.

Mr Ram Patnaik, an analyst at Religare, felt that passing on the huge tax burden for the non-filtered cigarettes to the consumers may not be possible as the segment is considered highly price sensitive and consumer behaviour is considered to be rigid.

According to industry sources, ITC may opt for gradual phase-out of the segment altogether and two other players in the segment — VST and GTC — may not have much option but to reduce the production of non-filtered smoking sticks drastically.

Introduction of filtered variety of the old non-filtered brands is unlikely to shift smokers’ loyalty, said an industry insider. “Retaining market share at the low price segments would be a difficult proposition in view of the competition from bidi and ‘unauthorised’ cigarette manufacturers,” said a cigarette marketing personnel.

Declining Acceptance

ITC, with a large basket of cigarette brands, may withstand the pressure better that others, which rely more on non-filtered verities.

Two non-filtered brands contribute roughly 30 per cent of ITC’s cigarettes volumes, while in case of GTC and VST, it is estimated to be more than 50 per cent.

Current lobbying by the manufacturers, with the Finance Ministry, might be described as a shot in the dark, an analyst with a large brokerage said. Interestingly, many of the brokerages have, of late, stopped tracking tobacco stocks, except for ITC, which is considered as an FMCG player.

“Increasing “sin” tax, gradually declining social acceptance, health and ethical issues are forcing brokerages to ignore the sector,” the analyst said. The proposed statutory pictorial warnings, instead of verbal currently in vogue, may further alienate smokers and investors from the sector.

The counters such as GTC, VST and ITC have fallen sharply in the past one month, after the new tax proposals in the Budget for 2008-09. GTC has lost 49 per cent, VST 23.5 per cent, ITC 5.37 per cent and Godfrey Phillips 1.5 per cent, much in order on dependence on the non-filtered sticks. Barring GTC, which moved up by 2.34 per cent, three others finished flat on Tuesday.