By Rutam Vora
Cigarette smoking is injurious to health but investing in tobacco stocks is now proving equally damaging for the health of the portfolio too. 

The central government’s decision of imposing additional excise duty on tobacco products has come as a dampener for tobacco stocks listed on the Indian bourses with stock prices continue sliding after the budget announcement made last month.

In his budget speech, India’s finance minister, Pranab Mukherjee had said, “I am making some structural changes in the excise duty on cigarettes, cigars and cigarillos coupled with some increase in rates.” He also proposed to enhance excise duty on all non-smoking tobacco such as scented tobacco, snuff, chewing tobacco etc, besides introducing a compounded levy scheme for chewing tobacco and branded unmanufactured tobacco based on the capacity of pouch packing machines.

The decision was, however on the lines of expectations as the volumes from cigarettes and other tobacco products had improved over past one year on the back of tax sops under the government stimulus package during the slump period.

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Mukherjee in his tax proposals, imposed additional 2% excised duty on the tobacco products making it to around 13%. The decision came at a time when the industry was experiencing attractive volume growth and increased margins on the back of fiscal stimulus packages.

But, as a matter of fact, the additional cost burden, cropped up due to budget announcement, would impact the balance sheets of the companies in either case. If companies shift the cost burden to the consumers, it will have a detrimental impact on the volume growth. On the other hand, absorbing the additional cost burden would hit the companies’ profit margins.

The tobacco products manufacturers including ITC Ltd, Godfrey Phillips, Golden Tobacco are among those getting a direct hit of the excise duty revision. ITC Ltd (BOM:500875) had already increased the price of its popular brand, Gold Flake Kings cigarettes by 7% as a pre-emptive step assuming the government was going to increase the tax burden. ITC stocks had tumbled sharply on the day when the proposal was made. However, the stock price has appreciated by over 4% since then till Friday, March 12, 2010. ITC stocks closed at Rs.258.40 on Friday. Although, the stock price appreciation is attributed to strong growth in other segments of hotels, agri-business and other FMCG products.

But not all the stocks had same fortune, leading cigarette maker, Godfrey Phillips India Ltd (BOM:500163) has tumbled over 3.3% since the tax announcements. The stock price ended the last trading session at Rs.1740.65 on the Bombay Stock Exchange (BSE).

Mumbai-based cigarette and other tobacco products maker, Golden Tobacco Ltd (BOM:500151), with the current market capitalization of Rs.2.20 billion shed losses to the tune of close to 3.4% and ended the last trading session at Rs.125.20 on BSE.

Hyderabad-based VST industries remained almost flat during the period with marginal gains of 0.2% to Rs.490 at the last trading session.

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Like this was not enough, the additional blow on the face of the investors came when some major cigarette consumer states in India raised value added taxes (VAT) rates for tobacco products. Gujarat raised VAT rates by 5%, making it to 20%. Now, Himachal Pradesh too has proposed to raise VAT rates from the existing 4% to 5% on all items including tobacco, cigarettes among others.

Mukherjee’s decision has come as a disincentive for those consuming tobacco products, but it has also created a disincentive for those investing in the tobacco stocks too. As it is said, health is wealth, but the health of portfolio is also equally important.


Vora is a Special Correspondent, Commodity Online News Service

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