ITC Aims to Smoke out Rivals with 64mm Cigarettes

Source from:  Moneycontrol.com  08/29/2012

Cigarettes to FMCG to hotels major ITC has been very aggressive in the FMCG space in recent times, with a slew of personal care and food products launched, backed up by a strong advertising push. However, its mainstay still remains cigarettes and its here that it aims to shake up the market with a new 64mm cigarette. The company has test launched the 64mm cigarette, under the Capstan brand, priced at Rs 2 per stick and Gold Flake at Rs 2.5, in June, to take on the unorganised market, where cheap local brands as well as many illegal ones are sold at as low as Rs 1. The 40% tax differential between 64mm and the usual 69mm cigarettes was also another key reason for ITC's move. After testing the 64mm cigarettes in Uttar Pradesh and Bihar, the company is now set to launch it nationally. Some analysts say the company is already testing the cigarette in several states apart from Bihar and UP. Media reports quoting Hemant Malik, COO, Trade, Marketing & Distribution, said the response for the 64mm cigarette has been good and so the decision to launch it pan India. However, there is no specific time frame yet for the nationwide rollout. "ITC's 64mm range is priced at a significant discount to its 69mm cigarettes (available at Rs 3 and Rs 4 per stick), though at a premium to illegal cigarettes (Rs1). We expect market share gain from illegal cigarettes due to ITC's superior distribution network; some step up from bidis to 64mm will also drive this category's growth," Abneesh Roy of Edelweiss Securities had said in a earlier report. ITC, citing independent research, said in its FY12 annual report that over 2005-2010, volumes of legal, duty paid cigarettes fell 4.4%, while duty not paid (illegal) cigarettes volumes rose 49.3%. In the first quarter (April-June), ITC's cigarette volumes rose just 1.5%. Brokerage Motilal Oswal expects ITC's cigarette volumes will grow 2% in the current financial year. Sharekhan analyst Kaustubh Pawaskar too agrees with the view that ITC's launch of the cheaper 64mm cigarettes will help it dent this fast moving illegal trade to an extent and also get new customers, who were earlier hooked to other forms of tobacco. "It is a right strategy by ITC as it will help it gain market share from bidi players and illegal cigarettes," he says. But he adds that although the acceptance has been good, one will have to monitor the sales of 64mm sticks for 3-4 quarters before one can comment on volume boost, margins etc. Pawaskar has a "hold" rating on the stock, citing recent runup in share price. But he says ITC remains a top pick as long-term growth story is intact. ITC shares were up about 1% at Rs 267.85 on NSE on Tuesday. The stock has gained near 17% since April this year, compared with 1% rise in the wider NSE Nifty index. Some analysts, however, are concerned over tightening regulatory environment for cigarette makers around the world. For instance, Australia's highest court recently upheld a new government law on cigarette packaging. According to the law, cigarettes can be only sold in olive green packs , without any brand colour or logo in that country. In India too, several states have raised taxes on cigarettes sharply. "The global tobacco industry is staring at a 'systemic risk', with Australia, the UK, Canada and Russia taking stringent actions that can cap cigarette sales and dilute brand franchise (packs sans logos, 40% per annum tax hike, etc). We believe that as regulatory concerns escalate, global majors will be de-rated and have a rub-off effect on ITC," Nikhil Vora of IDFC Institutional Securities said earlier this month, downgrading the stock to "underperformer". Enditem