ITC trades firm despite Maharashtra banning sale of loose cigarettes

 Shares of ITC were trading firm at Rs 173, up 1 per cent, on the BSE on Monday despite the Maharashtra government banning the sale of loose cigarettes and beedis, making it the first state to do so. The stock of the fast moving consumer goods (FMCG) company, however, underperformed the S&P BSE Sensex, which up 1.4 per cent at 37,919 points at 01:10 pm.

The Maharashtra government's move is aimed at ensuring that customers see the graphic, public health warnings mandated on cigarette packs. This regulation is mainly on small retail shops and would be difficult to implement on the ground, according to analysts.

“We have observed that ‘Gutka’ (that is banned) is also being sold easily in these small retail shops. Moreover, contrabands and illicit cigarettes now constitute around 30 per cent of total volumes. It is also selling openly in small retail shops. Hence, it would be a tedious task to implement these regulations,” ICICI Securities said in a note.

The brokerage firm also believes that cigarette companies can come up with smaller packs of cigarettes with leaner packaging if this regulation is extended in other states. However, the stock is expected to see a sentimentally negative impact in the near term, it said.

Despite ganing nearly 4 per cent gain in the past two trading days, ITC's stock has underperformed the market by falling 12 per cent in the last month. In comparison, the S&P BSE Sensex was down 4 per cent during this period.

“The news on the Maharashtra ban on loose cigarettes, while very difficult to implement, could affect cigarette volumes (if the implementation is extensive and stringent),” Motilal Oswal Securities said in a note.

The loose cigarettes contribute 70–80 per cent to cigarette volumes across various states. Maharashtra is among the large states in terms of cigarette consumption. Moreover, the impact would be higher if other states follow suit either in the near term or later.

The news of the ban on loose cigarettes only adds to other concerns, such as: persistent global ESG (Environmental, Social, and Corporate Governance) concerns on cigarettes (84 per cent of EBIT in FY20), the overhang of a further GST increase on cigarettes, and a continued weak earnings trajectory (6.6 per cent PBT CAGR over the last five years). This may be affected by the negative impact of Maharashtra’s loose cigarette ban (if implemented stringently) or any potential steep GST increase, the brokerage firm said with a ‘neutral’ rating on the stock.