How the Gutka ban can revive cigarette business

As India follows the rest of the world in adopting anti-smoking regulations, cigarette makers were worried over margins getting squeezed for core tobacco business. But fret not, as the recent ban on gutkha, a popular form of chewing tobacco, by Gujarat and Delhi is likely to increase the demand for cigarettes and offset the impact of regulatory hurdles.

The Gujarat and Delhi state governments banned gutkha from 11 September following a notification from the Food Safety Standards Authority of India, taking the number of states restricting the sale of gutkha to 11. According to a report by brokerage Anand Rathi, these states account for 45 percent of cigarette consumption in India.

[caption id=“attachment_454611” align=“alignleft” width=“380”]  The recent ban on gutkha, a popular form of chewing tobacco, by Gujarat and Delhi is likely to increase the demand for cigarettes and offset the impact of regulatory hurdles.[/caption]

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While there is no restriction on sale of loose tobacco or smoking tobacco products in these states, the brokerage expects 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,” it said in a recent report.

This could prove to be a major relief for ITC as it draws its investment clout from its cigarette business.

India has followed global trends in tobacco restrictions, banning smoking in public places in 2008 and a year later requiring graphic health warnings on cigarette packages. The government has steadily raised taxes on tobacco products too, most recently by 20 percent.

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Analysts had said earlier that this contributed to an unexpected 3 percent drop in ITC’s cigarette volume sales in the June quarter. In August IDFC Securities had downgraded the stock to underperform from outperform after Australia barred the use of logos on cigarette packs on August 15, sparking speculation that India’s regulators would follow suit.

However, Anand Rathi believes that the hiked excise and VAT rates on products such as gutkha and khaini would be a long-term positive for the cigarette sector as smokeless tobacco makes up 50% of tobacco consumption in India, while bidis account for 35% and cigarettes, the rest of the consumption.

The only caveat? Prompted by loss of revenues after the ban on chewing tobacco, state governments may increase taxation on cigarettes.