Tobacco Industry in India: Top 5 Stocks and Market Overview

The most common and dangerous medical condition faced by millions across the globe today is cancer. The leading contributor to cancer is tobacco and it is the root cause of many types of cancers as well as other diseases like lung disease, cardiovascular diseases, stroke, etc. Despite such grave situations arising from tobacco, it is widely used in India and accounts for a major contributor to the revenue of the country. The government has imposed many restrictions on this sector but the demand for the same keeps increasing in the national as well as international market. 

Given below is a brief overview of the tobacco sector in the country and the top-performing stocks in this sector. 

Overview of the tobacco industry in India

The revenues sources of the country include the direct tax from the citizens along with corporate tax as well as the indirect tax on the commodities and services. Among the indirect tax revenues, the revenues generated from tobacco and related products account for a major portion which accounts for approximately Rs. 953.19 billion in 2022 of the indirect revenues and an average of 86% of the tax revenues approximately. The tobacco sector in India is expected to grow at a CAGR of 11.94% from 2023 to 2028.

India accounts to be the second-largest producer and the third-largest exporter of tobacco in the world. The tobacco export for FY 2021 was approximately US$875.09 million while the export of the unmanufactured tobacco was approximately US$ 517.54 million.

Foreign Investment in the tobacco sector

The key export markets for Indian unmanufactured tobacco are Western Europe, Belgium, Korea, Nigeria, Nepal, and Egypt. Currently, the FDI presence in the manufacture of cigars, cigarettes, and tobacco substitutes is not permitted.

The Tobacco Dealers Association, as well as a parliamentary panel, has proposed permitting the FDI in the production of Indian Tobacco and cigarette manufacturing. This proposal is proposed with a view to providing due stimulus for agricultural exports. 

The tobacco sector is segregated into cigarette tobacco and non-cigarette tobacco and the cigarette segment is expected to show a volume growth of 0.8% approximately in 2023. Cigarette smoking is quite addictive and hence despite many government restrictions and awareness campaigns, the consumption of tobacco in the country is still increasing. The most dominant form of tobacco use in the country is in the form of smokeless tobacco. Smoking tobacco includes products like bidis, cigarettes, hookah, chillum, etc. The most commonly used tobacco products are Khaini, gutkha, betel quid with tobacco, and zarda.  

Distribution of the tobacco market in different segments

The tobacco sector in the country is segregated into many different segments. These segments help in better analysis of the sector and the market as a whole as well as help investors make better investment decisions. The key segments that are found in the tobacco sector and the analysis points for the investors are mentioned below.

1. Category based on the type of tobacco

Tobacco in the country is available in many forms and the key segments include,

1. Cigarettes
2. Cigars
3. Cigarillos
4. Roll Your Own
5. Smokeless Tobacco
6. Others
7. Category based on the intensity of tobacco

Apart from the above categories, tobacco is also classified based on its intensity in taste or concentration. These categories are mentioned below

1. Light
2. Medium
3. Others
4. Category based on the distribution channel

In India, tobacco is available through various distribution channels. This is another segment under the sector that needs thorough analysis and helps the participants in the sector under its core dynamics. Such details help them in taking suitable decisions to maximize their returns or streamline the distribution channels. 

1. Convenience stores
2. Tobacco shops
3. Supermarkets
4. Online stores
5. Others
6. Category based on the region of consumption and sale

The sales, revenue, and consumption of tobacco are also analyzed on a regional basis. The various regions to be analyzed in the country are distributed in the following pattern are

1. North region
2. South region
3. West region
4. East region

Regulations and challenges in the tobacco sector

The tobacco sector has many growth drivers despite severe restrictions by the government as well as many challenges. Some of the key factors in this regard are mentioned below

Advantages for the sector

The key factors that are an advantage for this sector are 

• Addictive form of tobacco that makes it harder for the consumers to quit and generates constant demand.
• The increasing prices of tobacco help the companies earn more revenue and also provide better returns for the investors.
  

Limitations of the sector

The major limitations of the sector are mentioned below.

1. The government has placed stringent restrictions relating to the advertising or promotion of tobacco in the country. This compels the companies in the tobacco sector to opt for surrogate advertising to adhere to the government norms.
2. The tobacco sector of the country is a huge contributor to its revenues of the country. The high taxes on this sector are one of the biggest limitations. These high taxes add to the prices of the final product and are therefore steep on the pockets of the ultimate consumer.
3. The increasing prices of the tobacco sector make tobacco products difficult to reach a majority of consumers. Therefore, such customers tend to move towards cheaper forms of tobacco in the country like bidis, chewable tobacco, and other smokeless forms of tobacco. Such factors contribute to the slow growth of the sector as compared to other sectors.
4. The lack of FDI presence in the tobacco sector further limits its growth in the country as well as impacts the export potential

Top stocks in the tobacco sector by market capitalization

The top stocks in the tobacco sector are mentioned below.

1. ITC

ITC is the largest cigarette manufacturer in the country. The company was established in 1910 and is present in many business segments like FMCG, Hotels, Agri-Business, etc. ITC accounts for more than 70% of the market share in the domestic market. The key details of the company are tabled below.

Category	Details
Market Capitalization	Rs. 3,21,698.60 crores
PE Ratio	21.73
Return on Equity	21.97 (March 21)
Debt Equity Ratio	0.00 (March 21)
Share price	Rs. 261.10
Dividend Yield	4.12%

2. Godfrey Phillip

Godfrey Phillips is the second largest name in the cigarette sector in India. It is the owner of brands like Four Square, Red & White, etc. The company was incorporated in 1936 and has its headquarters in Mumbai. The key details of the company are tabled below. 

Category	Details
Market Capitalization	Rs. 6,532.26 crores
PE Ratio	15.21
Return on Equity	15.81 (March 21)
Debt Equity Ratio	0.03 (March 21)
Promotor’s Holdings	72.83%
Share price	Rs. 1,257.30
Dividend Yield	1.91%

3. VST Industries

VST Industries is the third-largest company in the domestic market. The company has seen constant growth in its EPS and has had a good dividend-payout ratio for the past many years. The key details of the company are tabled below 

Category	Details
Market Capitalization	Rs. 4,967.36 crores
PE Ratio	16.24
Return on Equity	35.98 (March 21)
Debt Equity Ratio	0.00 (March 21)
Promotor’s Holdings	32.16%
Share price	Rs. 3,215.15
Dividend Yield	3.54%

4. Golden Tobacco

The company was incorporated in the year 1930 and was later taken over by Dalmia Group in 1979. The company is engaged in the manufacture of tobacco products as well as in real estate. The key details of the company are tabled below. 

Category	Details
Market Capitalization	Rs. 230.15 crores
PE Ratio	33.29
Return on Equity	0.00 (March 21)
Debt Equity Ratio	-0.01 (March 21)
Promotor’s Holdings	30.04%
Share price	Rs. 130.50
Dividend Yield	0.00%

5. Kothari Products

This company is one of the oldest names in the tobacco sector in India. The company was firmed in 1983 and has a huge presence in this sector. The key details of the company are tabled below.

Category	Details
Market Capitalization	Rs. 364.54 crores
PE Ratio	4.84
Return on Equity	-3.82 (March 21)
Debt Equity Ratio	0.92 (March 21)
Promotor’s Holdings	74.99%
Share price	Rs. 123.70
Dividend Yield	0.00%

Future outlook and trends in India’s tobacco sector

Let’s take a look at the future outlook and trends expected to be seen in India’s tobacco sector:

• The growth of the tobacco sector is being driven by increasing disposable incomes, rising urbanization, and growing youth population.
• The government of India is taking steps to reduce tobacco consumption by increasing taxes on tobacco products and banning smoking in public places.
• The tobacco industry is responding to these challenges by developing new products, such as smokeless tobacco and e-cigarettes, that are perceived to be less harmful than traditional cigarettes.
• The future of the tobacco sector in India is uncertain, but it is likely to remain a major contributor to the economy.

In short, the tobacco sector in India is expected to grow in the coming years, despite government efforts to reduce tobacco consumption. The tobacco industry is responding to these challenges by developing new products that are perceived to be less harmful than traditional cigarettes. It is likely that the tobacco sector will remain a major contributor to the Indian economy in the years to come.

Conclusion

Tobacco although being hazardous to health is not banned in the country. The country has put a ban on promoting and advertising tobacco and tobacco products but the sale of tobacco is not restricted. The sector has been growing at a slower pace which is good for the health of the citizens of the country but not for its revenue. 

FAQs

You may also like..

Top 5 stocks in telecom industry- Sector overview,market overview & future prospects

Top 5 Stocks With Highest 5Y CAGR in Their Sector

Sector Overview – Top Drone companies in India