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ITC (ITC IN, Rs170.90, Buy) – Plant closure will be temporary
ITC has stopped cigarette production in its plants, awaiting clarity from GOI on pictorial warnings.
Our channel checks reveal that since this deadline was known, ITC would have created inventory
buffer to ensure sales don't suffer. Given tax revenue implications to GOI, we expect the issue to
be resolved soon
Cigarette majors in India like ITC and Godfrey Phillips India have stopped cigarette production
from yesterday in all their manufacturing plants across India. Pictorial warnings were made
mandatory effective 1 December 2010, but there has been lack of clarity on the type of
warnings to be published. Industry sources tell us the health ministry wants every tobacco
product to carry a picture of a cancer-stricken mouth, but there is ambiguity over this.
Besides, the larger companies want uniform compliance of the regulation by all industry
participants.
Our channel checks reveal that since the 1 December deadline was known in advance and as
there was no clarity emerging on the type of warnings to be printed, industry players would
have created some buffer of stocks to ensure that cigarette sales do not suffer till complete
clarity emerges.
Given the revenue implications for both the Central Government, or GOI (from an excise duty
collection stand-point) and State Governments (from a VAT levy collection stand-point), we
expect clarification on this issue quite soon.
Since, over 70% of cigarette sales in India happen in the loose form, we do not anticipate any
material impact on consumption patterns post the pictorial warning implementation.
We have a Buy rating on ITC, and we do not expect any material revenue impact from this
news flow, and hence would recon any correction in the stock price due to this adverse news
flow as an opportunity to Buy.
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