Cigarette shares plunge as factories shut down
Mumbai: Shares of cigarette makers ITC, VST Industries and Godfrey Phillips India fell more than 3 per cent intra-day, amidst reports said that their managements had decided to shut cigarette factories in protest against a new government rule mandating bigger health warnings on cigarette packs.
The warnings were to have been in place from April 1, 2016. ITC finally closed 1.5 per cent down at Rs 330.95 on BSE, with earlier ITC shares touching a low of Rs 325.90.
A market leader in cigarettes, ITC is a diversified company with significant presence in hotels, paperboards and specialty papers, packaging, agri-business, packaged foods and confectionery, information technology, branded apparel, personal care, stationery and other FMCG products.
In a filing to the stock exchanges, the company said, “ITC has been compelled to shut its cigarette factories with effect from April 1, 2016 until clarity emerges in the current uncertain state of the rules on health warning.”
Paras Bothra, VP, equity research, Ashika Stock Broking said, “More than pictorial warning, the impact on these companies will be due to manufacturing being halted. It will impact their bottom lines. Depending on how many days the factories are shut, it will have a bigger impact if it persists for long.”
Blaming lack of clarity for the delay in implementing new health warnings, ITC said, “Since the matter of new health warning was under the parliamentary committee’s consideration and the government had itself held out that it would await the committee’s report, the industry was led to believe that the government would re-notify new health warnings after considering the committee’s recommendations.”
The implementation of any change in health warnings on cigarette packages is an elaborate process for the manufacturers, entailing months of preparation involving substantial cost and effort, ITC said.
Godfrey Phillips India shares closed 4.16 per cent lower at Rs 1,143.05 per share and touched a low of Rs 1,128.
Godfrey Phillips, which also informed stocks exchanges about temporary shut down of its production facilities at it Navi Mumbai facility for domestic market, said that they didn’t expect any material impact as they had sufficient stock of cigarettes for sale in the Indian domestic market.
VST Industries recovered to close 0.80 per cent lower at Rs 1,588.90 per share after touching an intra-day low at Rs 1,555.
VST Industries in a filing to the stock exchanges said, “VST Industries has stopped manufacture of cigarettes with effect from April 1, in view of uncertainty regarding rules on health warning….. We do not anticipate any material impact on the financial performance of the company due to the temporary suspension of production.”
ITC declined to talk about the stock movements. However, the company justified its decision to shut its cigarette factories. “ITC has been compelled to shut its cigarette factories with effect from April 1, 2016 until clarity emerges in the current uncertain state of the rules on health warning,” the company said, adding, “In this situation, the company, as any prudent person would, did not commit to wasting substantial resources in creating the large number of cylinders and other tools necessary for a change-over of the warnings.”
“A parliamentary committee was actively engaged in hearing and considering the representations of various interested parties, but the ministry of health and family welfare, contrary to its earlier decision to await the committee’s findings, on September 28, 2015 notified that the new warnings would come into effect on April 1, 2016,” ITC said.