[Intl-tobacco] Profile of Tobacco Industry in India

[robert weissman]

ITC's pot of gold? Bye, bye bidis -
Forbes/Rediff.com

S Dinakar, Forbes | February 14, 2006


On his way home from a Chennai construction site, Arumugam stops his
bicycle at a
shop to buy a Wills Navy Cut filter-tipped cigarette, a popular brand
made by ITC,
India's biggest tobacco company.

The migrant worker, like many of his countrymen, has cut down on cheap
bidis -- a
little stick of tobacco rolled in a dry leaf -- and switched to
manufactured smokes.


The Navy Cut will give Arumugam, 26, a more reliable drag for his habit,
but the
main reason he'll pay five times the cost of a one-cent bidi is for a better
standing among his smoking friends. "My favorite [film] hero also smokes
cigarettes," he says, and he's pushing his father to shift from bidis as
well.

Slideshow: Switching Smokes

Slideshow: The Worst Things You Can Do To Your Body

In a nation of 270 million smokers, only 15% have made that switch,
leaving a big
opportunity for ITC and its domestic rivals. Although ITC (once Imperial
Tobacco
Co.), with $3 billion in sales, would like to diversify from cigarettes,
which still
account for 70% of sales, it is loath to walk away from their addictive
profitability -- smokes are 84% of its impressive $500 million in
post-tax earnings.


Merrill Lynch forecasts ITC's operating income (profit before interest
and taxes)
will grow 20%, compared with less than 10% for most cigarette companies
globally.

Smoking is frowned upon in polite Indian society. But India is the
third-largest
producer and second-largest consumer of tobacco in the world. Most goes
into the
bidis, which enjoy political patronage and low taxes. (Cigarettes are
taxed 30 times
higher on a per-kilo basis, says ITC.) Hundreds of bidi makers scattered
across
India employ 5 million women and children in impoverished homes for a
few cents per
day. (ITC employs 20,000.)

Chewing tobacco, sold in single-use, colorful sachets in roadside shops,
is an
estimated $5 billion industry and accounts for nearly 30% of the
country's tobacco
market. It offers a bigger kick and skirts the spreading smoking bans
but gives
India one of the world's highest rates of mouth cancer.

Put that together and you get cigarette consumption far below that in
China and even
less than in smaller Indonesia. Yet bidis are for the poor, and India
aspires to be
richer. After falling in 2001, following a tax hike in 2000, cigarette
sales are
climbing again (see chart).

Western brands can come in but face a 30% import tax (smuggling is
rampant) -- plus,
cigarette advertising is restricted. So tobacco multinationals figure
they'd best
take a stake in a local producer, as Britain's BAT has in Kolkata's ITC
(32%).

Altria, the world's largest cigarette maker, holds, through Philip Morris
International, a 36% stake in ITC rival Godfrey Philips. (The U.S. giant
tied up
with China National Tobacco in December to make and sell Marlboro in
China, and it
paid $5 billion last year to buy Sampoerna, Indonesia's third-largest
cigarette
maker.)

Unlike in the West, cancer-related litigation is not a big risk factor
for the
industry in India, but regulation and taxes are a concern. ITC's
fortunes are likely
to fluctuate with India's annual budget.

Kunal Motishaw, who tracks the sector for Equitymaster, a Mumbai equity
research
firm, estimates that a 10-percentage-point increase in excise will hurt
ITC and
other cigarette makers, who have been spared a large hike since 2002
(there was a
10-percentage-point tax hike last year). Volumes dipped after a tax hike
of 15
percentage points in 2000-01.

But with cigarettes contributing 10% of the excise (indirect tax charged
on domestic
sales of products) revenues to a deficit-ridden exchequer, the
government must tread
with caution, lest it cripple sales.

ITC under Chairman Yogi C. Deveshwar has doubled revenues in a decade on
the back of
cigarette sales that are rising 13% a year. It owns six of the top ten
brands in
India, and in that favored position is less affected by the limits on
ads. Yet
Deveshwar, 58, an ITC veteran (barring a short stint as head of India's
international carrier, Air India), is himself having to tack through
changing social
and political winds.

He resolved a long-running dispute with the government on cigarette
taxes and has
tried to keep imports from getting too big an opening in the country's balky
liberalization. All the while, he's committed cash from cigarettes to new
businesses, much as Philip Morris/Altria diversified (with mixed
results) into Kraft
foods and Miller beer.

In fact, appearing before an auto group last September in his capacity
as head of
the Confederation of Indian Industry, Deveshwar said, "In the future,
there will be
no resistance from ITC if the government decides to extinguish the tobacco
business." He continued, "We are creating value in other areas."

When Deveshwar took over ITC in 1996, it was a cigarette company. After
exiting
failed investments in financial services and edible oils that he
inherited when he
took over, he pursued ventures where ITC could use its strengths in
distribution,
branding and services. A logical extension was fast-moving consumer
goods, because
ITC could sell foods through a network of 1.5 million small food stores
in India
that also sell cigarettes.

The chairman declined to be interviewed for this article, but he is pushing
businesses ranging from foods to retail to hotels. He took Wills, the
primary
cigarette brand, and downplayed it on the smokes' packages, instead
flaunting it to
sell ready-to-wear garments through ITC's own Wills Lifestyle retail
stores.

But new businesses, including foods and cyber-based support services to
agriculture,
are losing money. The latter, called e-choupal ("choupal" means "village
gathering
place" in Hindi), provides something like rural Internet kiosks, which
initially
distributed information on prices, weather and crop practices to farmers.

ITC, which has a special license to buy directly from farmers, bypassing
state-mandated traders, used 5,200 choupals in 31,000 villages to source
agricommodities from farmers at better prices and consistent quality.
Some farmers
sell through e-choupals because ITC pays in full and weighs the produce
correctly.

But revenues are slow to build because there are no immediate returns on
the $5,000
spent to set up an e-choupal. The money will eventually come from
selling goods and
services to farmers.

Meantime, losses from sales of biscuits, flour, retail and confectionery
ran to $29
million for the nine months ending in December 2005, though revenues
rose 81%.

ITC expects the foods division to break even in 2008 but is noncommittal on
e-choupals. "Our honeymoon gets over soon," says Ravi Naware, foods unit
boss.

But thanks to millions of new customers like Arumugam, and
notwithstanding which way
the state's winds blow, both India's and ITC's honeymoon with cigarettes
is likely
to continue.

http://www.rediff.com/money/2006/feb/14forbes.htm?q=tp