Consumer Goods - Will Singed Cigarette Players Resort to Sachet Salve? :: Edelweiss, link

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The new government’s toughening stance on cigarette players continues with the Health Ministry today accepting suggestions of ban on sale of loose cigarettes (~70% of sale), raising the minimum legal age for sale of tobacco products and increasing fines. The draft note has been sent for Cabinet approval. If implemented seriously (remote probability, in our view, given the dismal track record of guthka ban and ban on public smoking), cigarette players in order to circumvent the ban are likely to launch small packs, potentially leading to ‘sachet’isation of cigarettes (sachets contribute 75% to shampoo sale). However, one needs to monitor if the government prescribes pack size constraints as well. We expect the ban (if implemented) to be a near-term overhang on cigarette stocks (in spite of the fact that ITC is the cheapest consumer stock in our coverage); also, the Union Budget being mere 3 months away and stricter packaging norms coming into play starting FY16 further muddy the waters.

Likely ban raises a few pertinent questions

• Will implementation be effective?
• Was optimism in a section of investors due to change of guard at the Health Ministry premature/unwarranted?
• Can a ban on loose sales lead to higher consumption by a section of existing consumers due to ready availability (of packs)?
• Will consumers down trade to other forms of tobacco, especially bidis which have much lower regulations?
• Will it discourage new entrants from consuming cigarettes?
• Will it be approved by the Cabinet of Ministers/Parliament?

Devil lies in details and implementation

Details of the new regulations are awaited as the draft note submitted by the Health Ministry needs Cabinet approval (timeline not clear). Besides, the government will also have to be cognizant of tax losses stemming from a ban as the cigarette industry contributes USD5bn to the exchequer annually. We expect cigarette players to launch small packs which could lead to minor increase in packaging costs. However, implementation of the new regulations is a Herculean task. UK is one of the few countries where ban on loose cigarette is in force (regulation on pack size as well).

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https://www.edelweiss.in/research/EdelFlash-Consumer-Goods--Will-Singed-Cigarette-Players-Resort-to-Sachet-Salve/27690.html