ITC dips 3% on profit booking as govt drafts law to raise legal smoking age

Shares of ITC fell 3 per cent to Rs 204 on the BSE on Wednesday as investors booked profit after the government prepared a bill to raise the age for allowing sale of cigarettes and tobacco products to 21 years from the current 18 years. The stock was the top loser among S&P BSE Sensex and Nifty50 index, which were down a little less than 1 per cent, at 02:21 pm.

The counter has seen huge activities with trading volumes more-than-doubling. A combined 41.9 million equity shares of ITC have changed hands on the NSE and BSE, so far.

The central government, through the proposed Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Amendment Act, 2020, seeks to raise the minimum age limit for sale of cigarettes and tobacco products from 18 years to 21 years, and restrict their sale within 100 meters of any educational institution.

The draft Bill, piloted by the Union health ministry, also proposes to ban sale of loose cigarettes, increase fine on smoking in restricted areas to Rs 2,000 from Rs 200, and restrict advertisement (direct and indirect) of such products for personal consumption.

Since November, the stock has outperformed the market by surging 28 per cent, as compared to 22 per cent rally in the S&P BSE Sensex till Tuesday.

ITC’s historical focus on the ‘triple bottom line’ has meant that in the broader ESG (environmental, social, and corporate governance) framework, its performance has been remarkably good. However, its high dependence on the Cigarettes business has come under scrutiny of sustainability-compliant investors worldwide in recent years. The ESG-related multiples contraction is not likely to abate anytime soon, leading to continued selling from funds that are turning ESG-compliant in both India and globally, Motilal Oswal Securities said in recent report.

Despite ongoing improvement in other FMCG metrics, no material shift is likely in EBIT (earnings before interest and tax) dependence on the Cigarettes business. The business’ contribution to total EBIT is likely to be 82 per cent in FY23E v/s around 85 per cent in FY20, it said.

ITC’s cigarette business is expected to regain normalcy by January-March quarter (Q4FY21). Non-cigarette FMCG business is expected to deliver strong performance on the back of better reach and strong traction to new launches. The management’s enhanced focus and redefined growth strategies have aided scale of the non-cigarette FMCG business margins, analyst at Sharekhan said in Q2 result update. Any sustained scale-up in margins of the non-cigarettes FMCG business and normalisation in the core cigarette business would be key triggers for a valuation uptick, it adds.