The Hindu Business Line : GTC Industries: Hold

Consistent hikes in excise duty, severe restrictions on the tobacco industry and health concerns have stifled the cigarette business growth to 8 per cent during FY-05.

The company's dependence on the cigarettes business impedes growth prospects.

GTC Industries derives 98 per cent of its revenues from cigarettes and the balance from processed tobacco.

Its operating margin is comparable to that of its larger peers.

Aided by a 60 per cent fall in interest expenditure, GTC reported an earnings growth of 41 per cent in the trailing 12 months.

Its revenue growth from this business at 11 per cent and volume growth at 16 per cent outperformed the industry in FY05.

GTC has a low market share and low capacity utilisation levels within the industry.

However, sustaining a growth rate in excess of the industry's growth rate could prove difficult with restrictions on tobacco advertising.

Further, the ban on public smoking in some States has curbed the industry's growth.

These restrictions have compelled GTC to pursue costlier modes of sales promotion.

Part of this strategy is expanding its distribution channel in rural markets.

A ban on the sale of chewable tobacco could give a fillip to the company, as that might push customers to low-end cigarettes.

Given the limited scope for reducing the distribution and procurement costs of tobacco, GTC's operating margins from its cigarettes business is unlikely to expand.

As part of restructuring its operations, GTC had increased its focus on its two larger brands — Panama and Chancellor.

Satisfied with its performance in the mid-price segment, it plans to focus on the premium segment to expand its operating margin.

However, taking on the likes of ITC, which has a strong presence in this segment, would require time and huge resources.

Moreover, with cash flows barely sufficient to meet debt repayments, growth in the premium segment appears unlikely.

To reduce its dependence on the cigarettes business, GTC plans to diversify into other tobacco and non-tobacco businesses such as pan masala and confectionaries.

It plans to use its distribution channel to aid its earnings growth.

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