Itc, Bat To Gain From Pact
A licensing pact between ITC Ltd and Britain's BAT Industries Plc is likely to benefit both firms and may boost the premium brand cigarette market, officials of the Indian tobacco and hotels firm said on Tuesday. BAT had been pressing for a joint venture agreement but settled for the licensing deal, ITC officials said. "ITC was very reluctant to go in for the joint venture proposed earlier because they feared that the joint venture might not protect their interests," said an ITC executive.
ITC said Monday the two firms had signed an agreement to license BAT brands to ITC but gave no details. Newspapers speculated the deal allowed ITC to manufacture and market BAT brands State Express, 555 and Benson and Hedges.
The officials dismissed speculation that the entry of foreign brands could hurt ITC's premium brands, saying they could actually help expand the premium segment, which is only five per cent of India's cigarette market.
ITC and BAT have been negotiating the launch of leading BAT brands for several months, and at one stage BAT even proposed establishing a 100 per cent subsidiary to launch its brands in India. Asked about the secrecy surrounding the agreement, another official said, "There must be some clause of confidentiality in the agreement. It can also be that the two companies are waiting for the government's approval before divulging the details." He said that such agreements were normally valid for at least 20 years.
Another ITC official said, "We have to take into consideration how much royalty ITC will pay to BAT under the agreement. Royalties never exceed five per cent of net sales annually. In this case, it may be two to three per cent, which will ensure fairly good returns for BAT Industries," he said. Analysts said the agreement appeared would ease the stressed relations between the two companies, which have been marred by boardroom disputes. "This will not only ease out the tension between the two tobacco majors but also help the growth of premium segment market in India," one analyst said.
The licensing accord came days after the American tobacco companies agreed to pay $368.5 billion, admitted that tobacco is addictive and accepted extensive federal regulation over their products and advertising.
BAT has said its profit and volume in the US would be drastically reduced. The US agreement spurred speculation that Western firms would shift their focus to Asia.
"The US and British cigarette makers will have to look for new markets in India and China because of the curbs and restrictions in the Western countries," an analyst said. India is the third largest tobacco producer in the world, but ITC officials say its potential for consumption is untapped. Of the 450 million kg it produces annually, 55 million kg are exported as cigarette tobacco.