Daybreak - Why the ban on sale of loose cigarettes is not alarming investors

Episode Date: December 14, 2022

More than 70% of the cigarettes that are sold in India are sold in loose and yet, no alarm bells went ringing in the tobacco industry when a ban on the sale of loose cigarettes was announced. Will the ban even succeed in pushing down cigarette sales?Tune in.With inputs from Ayush Agarwal

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. On Monday, we heard the news that the government may soon impose a nationwide ban on the sale of loose cigarettes in India. Now, the thing is, more than 70% of the cigarettes that are sold in our country are loose. So you would think that this move could have a severe impact on the sales

of tobacco companies, right? And the most immediately visible impact would surely reflect in their stock prices? Surprisingly, that is not quite how it turned out on Monday. ITC or the Indian tobacco company, the leading cigarette maker in the country, actually saw no impact on its share prices after the news broke. It was the same for the same. It was the same. for other tobacco stocks such as Godfrey Phillips, VSC Industries and NTC industries. Why are tobacco investors not bothered at all by this impending ban on the sale of loose cigarettes? Welcome to Daybreak, a brand new podcast from the Ken. I'm your host, Nick Dha Sharma, and in each episode, I will tell you a business story

that is current, significant and most importantly interesting. Today is Wednesday the 14th of December. Health Organization says that India has the highest number of 16 to 64-year-old smokers in the world. And out of the total cancer-related cases that were reported in our country in 2020, 27% was due to tobacco. This is obviously a huge economic burden for the government. Between 2018 to 19, the total economic cost of diseases and deaths in India of people above the age of 35 years was more than $27 billion.

And smoking contributed to 74% of it. The government, of course, isn't oblivious to all this. On its part, it has tried several initiatives and campaigns to discourage the use of tobacco. Public smoking was made a punishable offence in the country way back in 2004. The government also made it mandatory for manufacturers to use enlarge graphic images of tobacco-related diseases on tobacco products, including cigarette packets, as warnings.

If you've been to watch a movie in a multiplex, then you've probably also seen the Government of India's public interest ad featuring Mukesh who died of oral cancer. Actually, even the ban on the sale of loose cigarettes is not really new. At least 17 states, including Maharashtra, Chattisgar and Karnataka, have already got this ban in place. But honestly, we all know that it's not. never really worked. And we'll get to the Y in a bit. Now, India is also a signatory to the WHO

framework convention on tobacco control. It involves regulating the packaging and labeling of tobacco products. India ratified the WHOFCTC in the year 2004. Not just that, cigarette taxes in India are among the highest in the world. And yet, India remains the world's second largest consumer of tobacco, and also the second largest producer. India's tobacco industry employs 43 million people. In fact, the Tobacco Board of India, a government body, has been even helping Indian tobacco producers with technologically advanced threshing plants and redrying factories. These places are used for pushing up the yield of a particular strain of tobacco that is exported

to different countries around the world. So the government clearly has to walk a tight rope between discouraging tobacco usage as well as safeguarding the Indian tobacco industry. Tobacco manufacturers are obviously aware of this and so are investors and analysts. In fact, the government of India even owns a 7.9% stake in the ITC. Some would even call this a conflict of interest. And this could be one of the reasons why, investors are not alarmed by the oncoming ban.

The other more practical reason is the enforceability of such a ban. A distributor for ITC in Andhra Pradesh told Ayushagirwal, a reporter at the Ken, that he believes it is impossible to enforce such a ban across every Panor tea shop in the country. And this is just based on the sheer scale of smokers in India and of course the number of small and big shops selling cigarettes. And if there is no enforcement, why would retailers participate in this ban and risk losing a customer by not selling them cigarettes and lose?

Even Professor Stano Nair, who teaches economics at IAM Calicut, said the same thing. He told Ayush that once the law comes into effect, you might see more vigilance, especially if there is a strong push by the government. But he says this vigilance will be short-lived and largely restricted to metro areas. But it is actually in the tier two.

and rural areas where the maximum consumption of smoke tobacco actually happens. And a large chunk of these smokers smoke bidies. In fact, bidi consumption is two to three times higher than cigarettes anyway. What then would be the meaning of this ban in such areas? The ITC distributor in fact said that earlier bans and increased cigarette taxes have only led to higher adoption of hand-rolled cigarettes or bids in the last few years. years. And as ironic as it may sound, the only threat to ITC share prices at this point, according to the ITC distributor, is from the huge number of new cigarette brands that have entered

the market in the last few years. Cigarettes also happen to be one of the most sought-after products smuggled into India. Its demand was even higher than gold in the last two years because of the massive profit margins. Now, if the government pushes too hard with the ban, there is a very high probability that it will actually indirectly end up promoting the illicit trade of cigarettes, which in turn will lead to huge revenue losses for the government. Most of these cigarette packets that are smuggled do not have graphic warnings prescribed by the government. Not only does this show the government in a bad light, it also undermines the anti-tabacco narrative that the government has been trying to build on for years.

Look at what is happening in Bihara and Gujarat with the liquor ban. In fact, the Patna High Court recently observed that the lives of people in the state have come under risk because of the state government's failure to effectively implement the much-doubted prohibition law. It also caused considerable revenue losses to the state exchequer. Reports already suggest that only 8% of the total tobacco consumption in India is in the form of legal cigarettes.

92% is procured through illegal means. This includes smuggle cigarettes and tax inefficient tobacco products such as beaids and chewing tobacco. So will this All India ban be any different from the state-wise bans that have ultimately turned out to be pointless? Will it actually lower smoking rates in India and affect the sale of cigarettes? The answer to that question is, well, it is, unlikely, unless we come up with some drastic measures, like New Zealand, which is all said

to enact a law that will criminalize smoking for anyone born after 2008. But can't something like that be done in India, a much, much larger country with a much larger population of smokers? WHO suggested that India should raise taxes further to 75% on cigarettes. But will it help or will it just lead to more illicit sale of cigarettes. The government can focus on creating more awareness for now. One of our subscribers wrote to Ayush with an interesting point. They said that bans on impulse-led vices such as smoking and drinking have never worked historically if they are implemented at the point of consumption.

If the government really wants to achieve its anti-smoking goals, it has to focus on restrictions at the production level. But considering such a large number of Indians work in the cigarette and b-d manufacturing industry, which also happens to be such a huge source of revenue, will it be feasible in India? Tell me what you think at daybreak at the ken.com. It is t-he-he-k-en.com.

Also, I would love to hear what you think of this podcast, so please, if you have any feedback and suggestions on how we can make the show better, please do let me know. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused news platform. What you're listening to is just a small sample of our subscriber-only offerings.

A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host. and today's episode was edited by my colleague Rajiv Sien.