An industry that is never out of fashion - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

An industry that is never out of fashion

Oct 13, 2010

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.

Equitymaster requests your view! Post a comment on "An industry that is never out of fashion". Click here!

2 Responses to "An industry that is never out of fashion"

Devendra Verma

Oct 15, 2010

I would appreciate, If you could provide some insight to Wine industry also.

Regards

Like 

ambroise

Oct 13, 2010

hi Pl u have kwon share nse india but my share have buy & ssell no kwon other Company money how? U can help me...

Like 
  
Equitymaster requests your view! Post a comment on "An industry that is never out of fashion". Click here!

More Views on News

What Happens if ITC Hives off ITC Infotech? (Views On News)

Nov 20, 2021

The cigarette to hotel conglomerate is reportedly mulling the demerger of its software business at a valuation of around Rs 250 bn.

What Sparked an 8% Rally in ITC Shares Today? (Views On News)

Sep 16, 2021

ITC did not participate in the rally after the second wave and continued to underperform its peers. Is this about to change?

ITC 2020-21 Annual Report Analysis (Annual Result Update)

Sep 6, 2021 | Updated on Sep 6, 2021

Here's an analysis of the annual report of ITC for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of ITC. Also includes updates on the valuation of ITC.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

What Led to the Massive Surge in the Stock of Jubilant FoodWorks? (Views On News)

Aug 18, 2021

Jubilant FoodWorks hits new high, surges 35% in a month on growth prospects.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

ITC SHARE PRICE


Nov 30, 2021 (Close)

TRACK ITC

COMPARE ITC WITH

MARKET STATS