Consumption of tobacco has been a tradition in India for centuries. Today, of the total tobacco consumption in India, around 48% is in the form of chewing tobacco, 38% as bidis, and 14% as cigarettes. Thus, bidis, snuff and chewing tobacco (such as gutka, khaini and zarda) form the bulk (86%) of India's total tobacco production. Internationally, more than 90% of tobacco consumption is in the form of cigarettes.
The per capita consumption of cigarettes in India is merely a tenth of the world average. This consumption pattern is a combination of traditional consumption patterns and the high price of cigarettes due to high tax imposed on them over the last 2 decades. In may be noted that cigarette smokers pay almost 85% of the total tax revenues generated from tobacco.
Cigarette sales in the country
The industry has been suffering recently as a result of high taxes and VAT being imposed by some states. Moreover, the government increased the excise duty on non-filter cigarettes. This resulted in the entire non filter segment becoming economically unfeasible for the organised segment to operate in. As a result, we have seen the entry of smuggled cigarettes which have captured a significant share of the overall cigarette market. However, in spite of this, we have seen the sales of cigarette makers grow. Sales of Godfrey Phillips have growth the highest over the last 3 years at an annual growth rate of 22% YoY. ITC followed close behind with an annual growth rate of 17% YoY. VST comes third but managed to grow at an annual growth rate of 12% YoY. More recently, tobacco players have also been facing the rise in cost of tobacco.
The largest cigarette seller in the country is ITC with a 90.3% market share in the cigarette market. The next largest player is Godfrey Phillips (7.2%) followed by VST (2.5%).
However, the operating (EBIT) profit margin of ITC has been significantly higher than the other players in the industry. For FY10, the operating profit margin of ITC came in at 53% a fall of 0.8% from FY09. This was the result of increase in tobacco prices. While operating profit margins for Godfrey Philips and VST fell by 5.8% and 4.2% to come in at 11% and 17.5% respectively. The fall in operating margins has been a result of higher raw material prices. However, ITC has been able to better control costs as a result of its size and its strong sourcing strength.
What we expect?
Despite high government intervention and campaigns against smoking along with high tax rates, tobacco companies are growing strongly. The ban on cigarette advertisement acts as an entry barrier for new companies and the only way for foreign players to enter the Indian market is to distribute their products through existing players (Marlboro a brand of Phillip Morris, USA is currently being distributed by Godfrey Phillips). Hence the competition is more from the existing players. We believe that the cigarettes business is recession proof and will continue to grow on the strength of distribution network and scale of operations of a company.
ITC Ltd has announced third quarter results of the financial year 2016-2017 (3QFY17). The company has reported 4.7% YoY and 5.7% YoY growth in revenues and net profits respectively. Here is our analysis of the results.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407