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

ITC Announces Quarterly Results (1QFY21); Net Profit Down 26.2% (Quarterly Result Update)

Jul 30, 2020 | Updated on Jul 30, 2020

For the quarter ended June 2020, ITC has posted a net profit of Rs 23 bn (down 26.2% YoY). Sales on the other hand came in at Rs 95 bn (down 17.4% YoY). Read on for a complete analysis of ITC's quarterly results.

ITC Announces Quarterly Results (4QFY20); Net Profit Up 9.1% (Quarterly Result Update)

Jun 29, 2020 | Updated on Jun 29, 2020

For the quarter ended March 2020, ITC has posted a net profit of Rs 38 bn (up 9.1% YoY). Sales on the other hand came in at Rs 114 bn (down 6.4% YoY). Read on for a complete analysis of ITC's quarterly results.

ITC 2018-19 Annual Report Analysis (Annual Result Update)

Jun 17, 2019 | Updated on Jun 17, 2019

Here's an analysis of the annual report of ITC for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of ITC. Also includes updates on the valuation of ITC.

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

ITC SHARE PRICE


Sep 25, 2020 (Close)

TRACK ITC

ITC - TIGER BRANDS COMPARISON

COMPARE ITC WITH

MARKET STATS