The Government of India is proposing a ban on FDI in Cigarette manufacturing in India. The move will come following request of the Health Ministry to include cigarette in the list of activities that are prohibited for FDI. However the domestic players does not seem to be affected adversely because capex and investment plans are generally not of substantial in nature for this industry. Presently, British American Tobacco, Altria Group and Japan Tobacco have the largest investments in India in this sector.
Amongst listed players we have ITC, GTC, VST Industries, and Godfrey Phillips India Ltd which is a KK Modi group company with foreign collaboration of global tobacco major Phillip Moris.
The percentage share of Tobacco products revenue of ITC has come down from nearly 75% from 2005 to around 50% presently.
According to a 2008 report, ITC controlled around 80% of the cigerattes market in India while the GTC (Golden Tobacco Company), VST Industries and K K Modi Group's Godfrey Phillips controlled respectively around 2%, 4% and 10% of the market share.
One view also surfaces that while ITC is purposefully trying to reduce its revenue share from tobacco products, and now this ban on foreign companies' investments. The existing companies will fare even better with some tobacco-investment-interested money coming through the route of stock markets i.e.FII route, which could come to the existing listed companies such as the ones mentioned above.
Releigh Investment Company Ltd. which is a subsidiary company of British American Tobacco Company holds 23.45% shares as promoters according to BSE data as on today. Now will they think of exiting VST Industries Ltd? Well, then if this ban is going to materialise they would do it today or tomorrow! They will have to be contended with the whatever present capacity is unless and except the new investment or capex plan comes from domestic funding/financing of some kind. But traditionally public and banks are resistant of financing tobacco businesses.
Talking about the GTC or Golden Tobacco Company, any value investor wouldn't understand why anyone would want to buy shares of this company. The revenues and bottom-line has been steadily declining for the last five years, except over 2005-06 to 2006-07 when revenues jumped from close to Rs.178 cr to almost Rs.200 cr. Their none of the brand holds appeal in all India market like other players. Other companies that are controlled by this Dalmia Groups are the times of india fame-Bennett, Coleman company, Dalmia Cements, ElectroSteel Castings Ltd.,Dalmia Cements (bharat) Ltd(which is trading at 240 PE of 12 calculated on 2008-09 EPS of Rs.20., Revathi Equipments Ltd., OCL India Ltd.(We have a buy recommendation at CPM 120, on this Dalmia group cement/refractries/sponge iron company having more than 1100cr topline and trading at a P/E multiple of 5.5 calculated on the basis of average EPS from year2004-05 to 2008-09.
The proposed ban is directly going to affect the foreign players in Indian markets. They will have to cut back their further investment plans. They may also have to import from their foreign manufacturing locations which could attract more taxes.
Whatever happens but this ban clearly means less Dollars for this cigerattes manufacturing companies.
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