BREAKINGVIEWS-Tobacco giants get another reason to quit India

By Ujjaini Dutta

BENGALURU, Jan 12 (Reuters Breakingviews) - Sometimes smokers are hit with a compelling reason to quit. India imposed fresh taxes on cigarettes last month, knocking as much as 17% off the shares of British American Tobacco BATS.L-backed $47 billion ITC ITC.NS and Godfrey Phillips India GDFR.NS which makes and sells Marlboro cigarettes under license with Philip Morris International PM.N. Foreign ownership limits and a ban on vaping had already dented the appeal of a market with 253 million tobacco users. The latest tax jolt is another nail in the coffin for overseas investment in the country.

Around the world, tobacco majors are shifting their focus to alternative products like e-cigarettes on the expectation that cigarette volumes will continue to decline on health concerns and tougher regulations. India's 2019 ban on e-sticks and heated tobacco products makes such a shift difficult for companies in the world's fifth-largest economy. The new excise duty only worsens the outlook.

Tobacco companies are well used to being slapped with sin taxes when government revenues need patching up. Smokes were already subject to a 40% levy following a rejig of goods and services taxes last year. The latest hike pushes the total tax on cigarettes to about 50%, according to brokerage Motilal Oswal. Analysts responded by revising down ITC's expected cigarette sales 13% lower for the next two full financial years, per S&P Global. Rather than quitting, though, most customers will simply downtrade to illicit smokes available in the black market.

Little wonder that BAT has been paring its stake in ITC, despite its 75% share by units of India's formal cigarette market. It has trimmed its 30% holding down to 23% over the past two years, joining other multinational companies in disposing their highly valued equity interests in the country to raise funds for their global business. Despite the tax hit, ITC trades on a rich 21 times one-year forward earnings, twice BAT's multiple, according to LSEG data. Indian cigarette makers are also less profitable, with ITC's net margin trailing its foreign partner's by four percentage points and Godfrey Phillips' roughly half, per Visible Alpha.

Smoking isn't good for you. India is succeeding in making it undesirable, even for corporations who are addicted to the stuff.

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CONTEXT NEWS

India will levy an additional excise duty on cigarettes in the range of 2,050 to 8,500 rupees ($22.8 to $94.5) per 1,000 sticks, depending on length, the finance ministry announced late on December 31. The revised dues will take effect on February 1. The new tax will apply in addition to an existing 40% Goods and Services Tax.

Shares of India’s ITC, the $47 billion conglomerate backed by British American Tobacco, fell as much as 9.7% on January 1, while Godfrey Phillips India, the distributor of Marlboro in the country, dropped 17%.