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Sc Ban Likely To Hit Itc Hard

BUSINESS STANDARD 

ITC today suffered a 8.8 per cent erosion in share price to close at Rs 672.45 on the Bombay Stock Exchange in response to two blows -- a Supreme Court order that reiterated a ban on smoking in public places, and a denial by Unit Trust of India (UTI) that it was negotiating sale of its stake in ITC to BAT plc of UK.

"The company has not seen the order and would not like to comment before examining it," was all that ITC sources said on the Supreme Court order. The effect of the order on sales, if any, would be visible only after a few days, they added.

As tobacco accounts for most of the company's revenues, the court order is perceived to be a major blow to future growth in sales and profits. In the first half of the current fiscal, the business accounted for Rs 4,015 crore of ITC's total sales of Rs 4,500 crore. It also accounted for Rs 918 crore of the company's H1 profit before tax of Rs 951 crore. ITC's consumer goods businesses and hotels yielded negative profits, while the paper, packaging and agri-business lines yielded minor profits.

Legal sources said the Supreme Court order appeared to be merely reaffirming existing regulations on use of tobacco for smoking in public places. These have been in place for some time, but most state governments have been lax in enforcing them in view of the generally accepted use of tobacco in all forms. Whether the rules would now be enforced would depend on the political will, they added.

Smoking of tobacco was not permitted inside hospitals and medical establishments as well as educational institutions in any case. The impact on these public places would be minimal.

There have some differences in legal circles regarding the classification of restaurants as public places. This had arisen following the restrictions on rights of admission in force at most establishments in the hospitality industry, sources said.

On the UTI move, stock markets reacted negatively as the denial appeared to rule out a price escalation in the scrip which would have occurred if BAT had stepped in. The management under chairman Y C Deveshwar had always sought to portray ITC as an Indian multinational in which BAT was one of three categories of shareholders holding around one-third stake of the company's Rs 245 crore paid-up equity. The other categories were financial institutions and the Indian public.

BAT had been running the company as a promoter in view of its historical role in setting up ITC 90 years ago. Prospects of BAT's renewed role in ITC had evidently enthused the market, though the BAT-managed VST Industries, another cigarette maker, had always been a severe underperformer compared to ITC.

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