After a bumpy 2020, new draft bill set to create headwinds for cigarette firms

NEW DELHI:  After a bumpy ride through the early months of the Covid-19 pandemic, the tobacco business has been normalising with the gradual reopening of economic activities.

While volumes have improved sequentially, localised lockdowns have resulted in slow recovery in some geographies.

For instance, ITC’s revenue from the cigarette business dipped 3.9 per cent in the second quarter (Q2 FY21) and volumes were down 12 per cent.

Analysts, however, see more potential headwinds this year driven by a new bill proposed by the Union health ministry.

Reports suggest that the draft Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Amendment Act, 2020 seeks to raise the minimum age for buying tobacco to 21.

It also proposes that trade and commerce in cigarettes or other tobacco products only be made carried out through sealed, intact, and original packaging.

“If this draft becomes a law, the cigarette industry would face further headwinds: difficulty in adding newer consumers..., and impact on cigarette volumes due to sale of only sealed and intact packs,” said Abneesh Roy, EVP, research, Edelweiss Securities.

However, it would be hard to monitor and implement this law, Roy added. That’s because the sale of loose cigarettes is still widely prevalent in states where this regulation has already come into effect.

Tepid demand outlook has also been a key worry and shares of cigarette makers have been bleeding heavily with the likes of ITC Ltd, Godfrey Phillip and VST Industries Ltd trading in the red.

Top players have also gone into a huddle fearing a further hike in excise duties. ITC shares closed 0.89 per cent lower (Rs 211.5 a piece) on the BSE on Tuesday. But analysts say the long-term perspective remains positive.

“We don’t expect a tax hike in the budget, but this new draft, if implemented, can be an overhang,” Roy added.