There was a capex of almost 25K Cr last 10 years… They invested heavily on machines and infrastructure across all verticals. So they won’t need much capex in the next decade… And they have about 30k Cr cash at hand… A good management should share the profits to its share holders… It was right decision to share more as dividend.
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The main reason for increasing the dividend payout was that share buyback would have resulted in increased shareholding of BAT, which the government doesn’t want and issue of ESOPs would have diluted shareholding which BAT doesn’t want 
So, the efficient way to distribute cash to all stakeholders was to increase management compensation and increase dividend payout.
Disc: Invested
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That looks a possible reason. What do you think of the rumors of government selling its stake in ITC?
Small piece wrt ITC in today’s Beyond the First Order – by The Ken
Read full edition here
Short end of the stick
Durga
The Indian government is ready to kick its cigarette habit. Let me explain.
On Wednesday, the government announced that it’s planning to sell its entire stake, or nearly 8%, in FMCG/hospitality/cigarette company ITC. This would help it raise around Rs 22,000 crore ($2.9 billion).
Now, ITC has a 77% market share in the tobacco industry, followed by Godfrey Phillips at a meagre 9.2%. It’s no small number. While ITC halted cigarette production in April due to the current lockdown, it has so far been a lucrative investment for the government.
Why would the government stub it out now?
Well, for one, cigarettes are a hard hit commodity this pandemic season.
Cigarette sales may fall by 10 per cent — the steepest decline in the last two decades — in this calendar year owing to a rise in taxes and the nationwide lockdown, according to market research firm Euromonitor International.
[…]
The last steepest decline witnessed by the sector was in 2015, when sales volume contracted 8.2 per cent to 88.1 billion sticks — a 15-year low then.
Covid-19 impact: cigarette sales may see steepest decline in 20 years, Business Standard
But, more significantly, the government’s decision shows where the fate of the leading cigarette companies lies. An even more heavy-duty ‘sin tax.’ And Covid is the perfect excuse to double down on those taxes, possibly like never before. Just like in the case of alcohol.
There’s some evidence of this brewing—even before Covid struck India. Here’s a little something from December 2019 (emphasis added):
According to the report presented by the committee in the 38th GST Council meeting, the government received several suggestions to increase GST revenues . The notable ones include having a two-rate structure with 10 per cent and 20 per cent slabs instead of the five at present, special higher tax on sin and luxury goods and cess on cosmetics, gambling and recreational services.
Two rate slabs, special tax on sin, luxury goods amongst suggestions to boost GST mop up, Business Today
For smokers, it’s going to be tough. More so because, thanks to a continued tobacco ban during lockdown, cigarettes sold in black cost almost double their MRP. And then some.
But investors are clear ITC might be the worst hit.
Shares of ITC dropped six per cent on Wednesday following reports that the government plans to offload its entire 7.9 per cent stake as early as this week.
[…]
“The market is worried that the tax-starved government might go after tobacco products, after training their guns on liquor,” said an analyst. “Also, there are concerns of labour unavailability at ITC factories,” he added.
ITC shares fall 6% amid concerns on stake sale, possible tax hikes, Business Standard
No surprise then that the government is ready to kick the habit.
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Dear Antokdavis,
This is a published article. I believe it is always good to know other people’s views on something that you are either invested in or are thinking of investing in. From your post it seems you might not think the same way.
If the thoughts put across in the article doesn’t make sense to you or seem improbable, kindly ignore.
For someone like me it might help to ascertain the possible risks to a story.
Regards.
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I always thought that for commodity sales related to addiction (like cigarette/ liquor), the absolute price of the commodity is not as relevant as commodity expense as percent of income. For any cigarette smoker, irrespective of additional tax, the expense on smoking is still going to be relatively low as percent of his/ her income. I do not think market should be reacting to tax issue. It is a different question if market is envisioning mass layoffs in the current situation - but, that does not seem to be the concern voiced for drop in ITC price
- Suraj Gaikwad
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I would request both sides, investor in favour of investing in ITC at current valuation (which include myself) and also other members who find ITC not an attractive idea at current valuations, to control the emotions and avoid personal attack. Just beacuase a member is sharing news/views which does not support other investor viewpoint, we shall not engage in personal attacks and seeking intent. Let us be professtional first and then being professional investors. If a person is putting efforts to provide negative view on stock which I am holding, I am really greateful to that individual. There are two probable outcome post negative news. I would evaluate more closely my investment thesis and find that concern whch are expressed in the news/views are not worth to worry in my opinion. While I did not change my view, the work on evaluating negative viewpoint has, at least, improved my CONVICTION in the investment. The improved conviction provide more confidence to held investment in volatilve/adverse time.
Second probable outcome would be I find concerns and risk expressed in viewpoint/news useful. In such case, it assist me to exit from stock investment not worth investing in my risk return profile.
In either way, I as investor gain from the negative views. Hence, please do not attack anyone who raise negative/differing view points. Please do not shoot the messenger,
In other side, the people who have negative view, can also provide what is jist of forwarding message. That would improve readability of thread and assist productive discussion,
@kitamr. Appreciate your effort to put forward news article which provide some information about adverse impact on ITC by higher tax. Please continue to provide your viewpoint, negative points on ITC with oneliner about news from your side. On behalf some forum members who are bit aggressive and also raised question about your intent, I apologise. Please do not hestitate to put forward a negative view point/messages after due verification (in social media world, give the kind of unsubstantiated forward, it apply to all including me). I would personally gain from such viewpoints for sure. Thanks for your efforts.
Discl: Same as previous post.
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As govt. figures out ways to further increase revenue from sources not tapped earlier, organized sector may benefit. Positive for ITC?
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There are a lot of people in the group who understand SEO extremely well. So, don’t worry on that front. Also, the links presented are all from established media sources (The Ken, Business Standard etc), so I don’t see a problem.
Thirdly, I don’t see any conclusion being drawn in the post mentioned by you.
Like @dd1474 mentioned let us be civil and understand and appreciate opposing viewpoints.
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While the new ESAR policy (ESAR 2018) was rejected by the shareholders, the existing schemes has room for grants to be made in the future. Having said that, the quantum of grant in future will be considerably lower than what it was in the past or in case ESAR 2018 was approved.
Regards
SJ
Well, any additional tax on cigarettes will only help the black market to thrive and thereby lose of excise revenue to the exchequer …the prudent approach would be to take stringent measures on controlling the black market. Why kill the golden goose ?
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Very true. According to an article posted above the numbers are staggering!
The goverment collects about 35,000 crores from taxing legal cigarettes every year…It is estimated that on account of illegal cigarettes alone, the revenue loss to the Government is more than 13000 crores per year. About 68% of the tobacco consumed in the country remains outside the tax net…Therefore, it’s evident that not only does taxation fail in it’s purpose, it leads to incentivising illegal participants in the market, and hence hurts the government’s ability to collect significant revenue.
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ITC forays into packaged lassi to expand its dairy business - The Economic Times https://m.economictimes.com/industry/cons-products/food/itc-forays-into-packaged-lassi-to-expand-its-dairy-business/articleshow/75719201.cms
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If this government has any sense, they will go after illegal cigarettes instead of increasing tax on legal cigarettes.
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https://myneta.info/party/index.php?action=all_donors&id=3
Its more than taxes from ITC for political parties… ITC has been one of the top donors for BJP, just an added info if it helps…
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I really see no merit in point that donations to ruling party has favoured ITC. In fact, last 5 years are prorably among the worst five years in policy perspective for Cigarette industry. Also, singificant amount of tobacco in non-Cigaretter has cash component of business. In case of ulterior motive to get benefit, one would pay facilitating money in cash then by bank in my view. In fact, when 70% value addition in Cigarette is going to state/central by various tax/levies, it is more important for Centre/State that industry survive than other way round. Show me a single industy which give 70% of revenue (Crude exploration may be exception due to government ownership) with Government. Government as stakeholder take maximum value addition share as compared the vendor, employee, shareholder and society in Cigaretter.
If one wonder why Bidi being taxed at lower rate, beside being seen as pro-rural, many politician have made their political career funded from Tobacco business. One name come to my mind is Praful Patel of NCP. His father was also MLA from Gondia, Maharashtra.
There are multiple issues about corporate governence with ITC in past which are highlighted and discussed on threads. However, donation to rulling party is normal business feature in Indian context. Hence, I would not give more weightage to this information. Please note that I could be wrong in my assessment.
Discl: Same as pervious post.
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Does the company share brandwise revenue and profitability? Has anyone compiled this data over the past few years?
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Brand wise profitability Im not sure… But brand wise revenue and market share is discussed and tabulated here… Its HDFC report…
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This forced reduction leading to de addiction seems to be a misconception.
didnt we see how people flouted all social distancing norms to line up for alcohol ? why ? shouldn’t they have been de-addicted by the lockdown ?
i feel when conventional distribution channels of legal cigarettes are shut in lockdown, the cigarettes consumption is being supported by the illegal cigarettes industry. doubt if one could put any numbers to it, but a scuttlebutt and a talk with ur nearest pan waala should be able to tell you the scenario.
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