India Consumer - Gutkha demise resurrects cigarettes - Anand Rathi

With Gujarat and Delhi recently banning gutkha , the number of such states has reached 11. We see this is a positive for cigarette companies, considering the hike in excise and VAT rates in recent central and state budgets on bidi and gutkha. Cigarette consumes only 15% of the tobacco in India which indicates long term growth opportunity.

- Ban on gutkha in Gujarat and Delhi. The Gujarat and Delhi state governments have banned gutkha from 11 Sep'12, following a notification from the Food Safety Standards Authority of India. The notification bans all food products with tobacco or nicotine. Other states that have done so in the past are Madhya Pradesh, Kerala, Bihar, Maharashtra, Rajasthan, Haryana, Jharkhand, Punjab and Chandigarh. However, there is no restriction on sale of loose tobacco or smoking tobacco products.

- Better growth prospects for cigarettes. We believe that the abovementioned states account for ~45% of the cigarette sector in India. Though loose tobacco and cigarettes are consumed by different types of people, we believe the news will be a positive for cigarette companies. We expect low-end brands such as Bristol, Flake and Scissors of ITC and Charminar of VST to benefit. Also, we estimate the new cigarette of 64mm to command higher volumes, finding favour with former gutkha consumers.

- Restrictions on smokeless tobacco good for cigarettes. Recently, both Centre and states hiked excise and VAT rates on products such as gutkha and khaini. We believe incidences such as the ban on gutkha in some states would be a long-term positive for the cigarette sector as smokeless tobacco makes up ~50% of tobacco consumption in India. Bidis account for 35% and cigarettes, the rest of the consumption.

- Stock calls. We expect a positive impact of these announcements on all cigarette stocks-ITC, Godfrey Philips and VST Industries. ITC is our top pick among cigarette companies and we expect it to report FY13 volume growth of 1-2% against market expectations of a decline in cigarette volumes.

Source : Equity Bulls

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