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Gutkha Ban: Not to chew up cigarettes

Edelweiss | 14 Sep, 2012  | Follow Author | Add to my Favourites 
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Fourteen states in India have banned gutkha using regulation that prohibits sale of food products containing tobacco. Key investor concerns on this are: (1) How effective will be this ban, (2) Can it be extended to cigarettes in the long term and (3) If and by how much cigarettes stand to benefit in the medium term. Edelwiess feels that the ban is likely to be effective only if implemented nationwide via strict monitoring and punitive actions against offenders. Currently gutkha is being smuggled from neighbouring states to states where the ban is in force or is being sold as separate ingredients (making it legal since it no longer qualifies as food containing tobacco). Yet, the ban is expected to curb tobacco consumption to an extent as it would become less accessible (unavailable publicly; but illegal gutkha is sold at 5‐10x the earlier price). Edelweiss does not expect the ban on gutkha to be extended to cigarettes. They assume this to be mildly positive for cigarette players due to the likely shift of gutkha consumers (addicted to tobacco); at the same time they will watch out for the implementation of plain packaging law on cigarettes (already implemented in Australia).

Gutkha ban to hurt Rs150‐200bn industry

Using provisions under the Food Safety and Standards Regulations (2011) that bans food articles containing tobacco, many states like Bihar, Maharashtra, Madhya Pradesh, Punjab, Rajasthan, Chhattisgarh, Delhi, Goa, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Kerala and Mizoram have banned the sale, manufacture and distribution of gutkha (contains ~3095 chemicals including 28 carcinogenic substances).

Cigarettes to be spared from curbs

Edelweiss does not expect the ban on gutkha to be extended to cigarette as (1) it is not classified as a food item, (2) it is a major source of revenue for the government and (3) it is not banned anywhere in the world. In the past, several measures such as stringent warnings on cigarette packs, ban on cigarette advertising, ban on smoking in public places and higher tax burdens were used to discourage the use of cigarettes. Since the implementation and enforcement of these regulations is slack, cigarette consumption remains intact.

Outlook: Mild positive for cigarette players

Cigarette industry may benefit in a smaller way as some gutkha consumers may switch over to cigarettes as the price differential between illegally available gutkha and lower end cigarettes is very narrow. Players like ITC and VST have recently rolled out low price points in cigarettes (Rs2) which may also serve as an entry point for the new customer base. However, Edelweiss does not expect this shift to be huge as cigarettes are a more visible form of tobacco consumption and there is not much duplication in the consumer base of gutkha and cigarettes.

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About Edelweiss

Edelweiss is one of the leading financial services company based in Mumbai, India. Its current businesses include investment banking, securities broking and investment management. They provide a wide range of services to corporations, institutional investors and high net-worth individuals.


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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