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Cigarette plants shut by cigarette manufacturers due to uncertainty over
graphical warnings
According to news reports, cigarette majors like ITC and Godfrey Phillips have shut their
cigarette manufacturing units due to uncertainty over the new graphical warnings on cigarette
packs. The new graphical warnings were scheduled to be implemented on Dec 01, 2010.
However, till date no communication has been received from the Health and welfare ministry.
As per news reports, Udayan Lall, director (Tobacco
Institute of India), has said that "Companies making
cigarettes and bidis have been forced to close down
production due to the uncertainty regarding the
warning,". He further said that the companies had
written a letter to the ministry seeking clarity on the
kind of pictorial warnings to be carried on packs,
but no clarity has emerged from the government on
the same. According to Mr.Lall, tobacco companies
were under an impression that the December 2010
timeline for putting pictures of 'Mouth Cancer' on product packs would get pushed back.
ITC's cigarettes volumes during 3QFY11 to be undeterred by the shutdown
After our interaction with the ITC management, we understand that the company was
prepared for such kind of situation and therefore has an adequate inventory of cigarettes in
the market. Our industry sources have also indicated that the cigarette manufacturers have
built up high inventory levels in the market during the past two months to face the uncertainty
in the short term. Hence, we believe that ITC's cigarette sales volumes should not be impacted
due to the shutdown during 3QFY11.
New graphical warnings may have short term impact
Given a situation that the graphical health warning is issued in its planned form in the
recent future, the same is expected to have a short term negative impact on the cigarette
Source - Ministry of Health & Family Welfare
sales as the graphical warnings is a clearer depiction of the infected organ. However, as a
majority of the cigarette consumption (about 60-65%) is in loose form (not in packs), the
magnitude of impact would be low. Further, the cigarette business being of addictive nature
is expected to bounce back.
Continue to believe in the addictive strength of cigarette business -
Maintain BUY
Over the years, cigarette volumes have demonstrated strong resilience to the smoking bans
and the steep price hikes (arising from duty hikes). We, therefore, continue to believe in the
strong addictive pricing power of ITC's cigarette division, and hence, maintain our positive
stance on the company.
At the CMP of INR171, the stock is trading at a PE of 25.7x FY11e and 21.5x FY12e. At
the current levels, we reiterate our BUY recommendation on the stock with an SOTP-based
target price of INR192, providing a 12% upside.
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