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India smoking ban may hurt tobacco stocks briefly

Indian tobacco stocks fell sharply on Wednesday after the government said it will introduce legislation to ban smoking in public places and tobacco companies from sponsoring sporting and cultural events.

The shares of ITC Ltd dropped 11.7 per cent to a more than two-month low of Rs 775.

Godfrey Philips India Ltd plunged 8.0 per cent to Rs 496.85, and VST Industries Ltd sank 8.0 per cent to a near 8-month low of Rs 79.15. Analysts said the pending government legislation and other factors will combine to depress tobacco stocks in the short term.

But longer term, the ban on tobacco advertising is unlikely to stunt ITC's earnings growth and its shares remain a good long-term bet, they said.

"ITC will be a short-term underperformer. But I expect it to bounce back by the second half of 2000," said Gaurav Narain, analyst at SG Asia Securities.

The government said the new measures would be a part of a comprehensive tobacco control bill to be introduced in the next session of Parliament starting February 19.

Analysts rattle off a list of reasons why the ban won't have a major impact on ITC, one of the largest sponsors of sport in the country. Its brand Wills sponsors the Indian cricket team.

Some Indian states have already banned smoking in public places and tobacco companies are already banned from advertising their products on television, including satellite TV.

All that has had little impact on cutting cigarette consumption or in slowing the earnings growth of Indian tobacco companies, analysts noted.

Further, enforcing the ban on smoking in public places will be difficult.

"When you go out on the roads, you find most policemen either smoking or chewing tobacco. How do you expect them to implement the ban?" asked an analyst with a local brokerage.

Surrogate advertising

The impact on ITC would also be minimised if the new legislation fails to spell out clear rules regarding surrogate advertising.

Other products such as sporting goods, apparel and holiday packages are sold under the same names as some of ITC's most famous cigarette brands, providing the company with alternative channels for building name recognition.

For instance, ITC markets sporting goods and apparel under the name Wills, India's top-selling cigarette brand. Gold Flake, another top-selling cigarette brand, is also the name for holiday packages called Gold Flake Golden Getaways.

Analysts also suggested the drop in tobacco company share prices may be prompted by something else the government is about to do.

"I think the markets are also afraid the government may impose a higher excise duty in the coming budget on top of these measures," said an analyst with a foreign brokerage who did not wish to be named.

The government budget for the year beginning in April will be unveiled on February 28.

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