Indian Cigarette Makers May Feel The Heat As U.S. Proposes Nicotine Cut

India's $11-billion cigarette market may also feel the impact of U.S. drug regulator's proposal to cut the level of nicotine in cigarettes.

The second biggest consumer and third largest producer of tobacco is among the 180 countries that are signatory to the 2005 WHO Framework Convention on Tobacco Control. It's an internationally coordinated response to combating tobacco usage and sets out specific steps for governments to address the problem.

If the U.S. passes the move to regulate the $130-billion American tobacco industry and the World Health Organisation finds merit in the proposal, it could well be included in FCTC. While implementation may take years, it does signal stricter regulations for tobacco companies in the years to come. Last year, the Indian health ministry had reiterated the country's commitment to the full implementation of FCTC as tobacco drains the economy of billions of dollars.

The U.S. Food and Drug Administration said it will seek public feedback on its bid to slash nicotine content in cigarettes. The agency, led by President Donald Trump's pick Scott Gottlieb, also said it would delay deadline for electronic cigarettes to require the agency's clearance till 2022. Shares of American cigarette giants like Altria Group Inc. and British American Tobacco Plc fell the most since 2008 recession after the regulator's proposal.

Also Read: FDA Cigarette Proposal Tests Teflon Tobacco Stocks

The negative sentiment impacted Indian companies as well. Shares of ITC Ltd., India's largest cigarette maker with three-quarters of the market share, fell 2 percent to close near its two-day low. VST Industries Ltd. and Godfrey Phillips India Ltd. also ended between 1 percent and 2.5 percent lower.

India already has health warnings on cigarette packs, which cover 85 percent of the front and back. Any move to reduce nicotine level will impact the volume growth of cigarette makers.

If implemented, the U.S. regulator's policy would be a deterrent for new smokers, said Sanjay Manyal, equity research analyst at ICICI Securities Ltd. However, a policy like this to get implemented may take time and its impact on the Indian tobacco industry can be assessed only after regulation details are in place, he said. ICICI Securities has a ‘Buy' rating on ITC.

CLSA estimates the company's volumes to drop after an additional cess under the Goods and Services Tax increased the effective levy on cigarettes. Earlier, the brokerage had said that the taxes on cigarettes will fall after the GST rollout as the additional excise duty had been abolished. The benefit was short-lived with the GST Council deciding to increase the cess to offset any gains.

So, a regulatory respite for cigarette companies is unlikely. The only silver lining for an investor is that ITC has never had two consecutive months of large losses since 2008. Maybe, history could come to its rescue.

Also Read: Fewer Indians Use Tobacco, But India Still World's Second Largest Consumer, Producer