Industry AnalysisTobacco Sector

Abha MahapatraBFIA (75003)SSCBS

Contents

•Sector AnalysisI. Surveys and StatisticsII. Government InitiativesIII.Market ShareIV. SWOT AnalysisV. Porter’s Five Forces ModelVI. BCG MatrixVII.Lifecycle AnalysisVIII.Ratio Analysis

Companies studied

•ITC Limited•Godfrey Phillips India•VST Industries Limited

Tobacco Sector Analysis

Sector at a Glance

•One of the most profitable industries in the world.

•Industry worth INR 58730 crores in 2009.•CAGR-8.5%•By 2014 CAGR will be 6.9% and the

forecasted worth is INR 81790 crores.

Global Adult Tobacco Survey – India’

Education Proportion of Tobacco users (%)

Secondary Education and higher 21%

Primary Education 33%

Less than Primary Education 45%

No formal schooling 44%

In 2009 ‘Global Adult Tobacco Survey – India’, was conducted across urban and rural regions of 29 states in India to understand the tobacco consumption trends in the country. The following were the results observed in the Indian scenario:

Tobacco use among males by age category

12-18 Years

19-30 Years

31-40 Years

41-50 Years

51-60 Years

Sample 8587 13216 7805 5920 5168

Tobacco users

1860 7026 5186 4193 3638

Prevalence 22 54.9 67.6 72.0 71.5

Indian Tobacco Market: Share of top five players vs other players, by category, 2009

Chewing Tobacco Cigarrettes Cigars0

20

40

60

80

100

120

Column1Others

Market share in Percent-age

Smokeless Tobacco• Leading Companies and Popular Brands (Smokeless Tobacco

Company Shares ‐ Retail Volume (%) )

Company

2001 2002 2003 2004 2005 2006 2007 2008 2009

Dhariwal Industries Ltd

11.5 11.8 11.8 12 12 12.3 12.3 12.5 12.5

Dharampal Satyapal Ltd

7.8 8.2 8.8 9.3 9.5 8.8 7.8 7 7.2

Som Sugandh Industries Ltd

3.7 3.8 4.3 4.2 4 4.7 5 5.5 6

Shree Meenakshi Food Products Pvt Ltd

2.3 2.5 2.5 2.8 2.8 3 3 3.2 3.5

Kothari Products Ltd

4.5 4.5 4.2 4.3 4.3 4 3.5 2.8 2

Others 70.2 69.2 68.4 67.4 67.4 67.2 68.4 69 68.8

The Cigarette Industry

• India’s total cigarette production is valued at '22,000 crore, of which 12 per cent is exported.

• The cigarette market is dominated four key players — ITC, Godfrey Phillips, VST and GTC.

• Cigarette sales in the country saw a drop in 2009 over 2008 due to high excise duties and other taxes.

• The government has banned foreign direct investment in cigarette manufacturing for domestic consumption or exports, closing the doors for companies like Japan Tobacco, BAT and so on.

Historic India Cigarette Market Size

Retail Volume (billion sticks) 1999

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

99.6 98.7 89.3 91.9 94.5 96.5 100 101.1 99.8 91.2 90.3

Leading Cigarette Brands Promoted in India

Brand Company name 2009

Gold Flake ITC Group 31.2

Wills ITC Group 18.2

Scissors ITC Group 8.4

Four Square Godfrey Phillips India Ltd 7.9

Capstan ITC Group 7.4

Bristol ITC Group 6.9

Charminar VST Industries Ltd 4

Red & White Godfrey Phillips India Ltd 3

Charms VST Industries Ltd 3

Cavenders Godfrey Phillips India Ltd 2.5

Government Initatives• 1975: The Cigarettes Act 1975 made a statutory

health warning mandatory on all cigarette packets.

• 1980: The central and several state governments imposed restrictions on tobacco trade and initiated efforts for comprehensive legislation for tobacco control.

• 1990: The Central government issued a directive for prohibiting smoking in public places, banned tobacco advertising on national radio and TV and made display of statutory health warnings on chewing tobacco products mandatory.

•1991: The Central government directed the Central Board of Film Certificate to comply with the Cinematography Act 1952.

•1995: The Parliamentary Committee on Subordinate Legislation examined the existing Cigarette Act and made specific suggestions for stronger provisions..

•1999: Ministry of Railways banned sale of cigarettes and bidis on railway platforms and inside trains.

•2000: Central Government banned tobacco advertisements on cable TV.

• 2001:Ministry of Railways imposed ban on sale of gutka at railway stations, concourses, reservation centres and inside trains. The National Commission on Human Rights at the S.E. Asia regional consultation meeting, advocated for tobacco control as an essential measure to protect human rights

• 2001-03: The states of Tamil Nadu, Kerala, Andhra Pradesh, Maharashtra, Bihar, Goa and Madhya Pradesh banned the production and sale of gutka and pan masala under the Prevention of Food Adulteration Act.

• 2008:A nationwide ban on smoking at the workplace and in restaurants, hotels, pubs, public transport (buses, trains and metros), airports and railway stations, educational institutions, cafes, theatres and other public places came into effect from 2 October 2008.

• 2o11:Govt bans FDI in cigarette manufacturing

Growth Potential

Market Share

Chewing Tobacco 21%Bidis 43%Mfg Exports 2%Un-mfg exports 19%Cigarettes 15%

Market Share

•Indian Cigarette pie

Market share

ITC 72%GTC 8%VST 8%GPI 22%

SWOT Analysis

Strengths•India one of the largest manufacturer of

Tobacco.•Export Potential.•Amounts for 5.8% of the international

trade and ranks 5thafter Brazil, U.S.A. Turkey and Zimbabwe.

SWOT contd.

Weaknesses•Increased taxation•Badly developed relations between

producer and buyer.

SWOT contd.

Opportunity•Research for development of alternative

uses of Tobacco in view of anti-smoking campaign.

•Significant opportunity for exports.

SWOT contd.

Threats•Total ban on direct and indirect

advertisements of all tobacco products.•Prohibition on sponsorship of sports and

cultural events which encourage tobacco use; ban on smoking in public places.Ban on smoking in public place.

•Eroding social acceptability of smoking

PEST Analysis

Political Factors•Challenging environment with respect to

government regulation. •Taxation.

PEST contd.

Economic Factors•India among top three producers in the

world.•Among top 10 exporter.•2.3 million persons depended on this

sector for livelihood.•Total net value added by all enterprises

averaged Rs 15000 million.

PEST contd.

•Social Analysis•Growing public concern against

increasing consumption of tobacco.•Restrictions by government has made the

promotion of tobacco brands almost impossible.

PEST contd.

•Technological analysis•Great inventory control.•Logistic Support.I. Hardware investment(high shelves,

large storehouses etc.)II. Software investment(GPS monitoring

circuits, long-distance clients landing enquiries, GIS circuit optimization, and online method of electronic clearing, etc.)

BCG Matrix

Market attractiveness & Competitive strength is also important.

ITC - CIGARETTES GTCI VST

GPI

?

New Entries:Buyers bargaining powers:Oligopoly market situation.

➢ Suppliers bargaining power:Fragmentation, consolidation & integration.Low switching costs

➢ Threat of substitutes:Depends on buyer to buyer. Some are Brand Loyalists.

➢ Competitive rivalry:New innovative products by rivals.

Porter’s Five Forces analysis

Lifecycle Analysis

ITC LtdGodfrey Philips India and VST Industries

Ratio Analysis

•Liquidity Ratio•Profitability Ratio•Efficiency Ratio•Solvency Ratio

Liquidity RatiosCurrent Ratio

2011 2010 2009 2008 2007 2006 2005

ITC 1.189 1.009 1.73 1.58 1.63 1.44 1.167GPI 1.63 1.97 1.66 1.52 1.75 1.66 1.27VST 0.78 0.69 0.64 0.45 0.55 0.54 0.78

2005 2006 2007 2008 2009 20100

0.5

1

1.5

2

2.5

ITCGPIVST

•Acid Test Ratio

2011 2010 2009 2008 2007 2006 2005

ITC 1.1 1.022 1.201 1.065 1.231 1.15 0.79GPI 0.615 0.67 0.46 0.5 0.71 1.26 0.494VST 0.15 0.11 0.12 0.11 0.1 0.2 0.4

2005 2006 2007 2008 2009 20100

0.2

0.4

0.6

0.8

1

1.2

1.4

ITCGPIVST

Solvency RatiosDebt Equity Ratio

2011 2010 2009 2008 2007 2006 2005

ITC 0.01 0.01 0.01 0.02 0.02 0.01 0.03

GPI 0.29 0.17 0.17 0.21 0.15 0.21 0.19

VST 0.06 0.02 0.01 0.04 0.05 0.02 0.24

2005 2006 2007 2008 2009 20100

0.05

0.1

0.15

0.2

0.25

0.3

ITCGPIVST

Profitability RatiosOperating Profit Margin

2011 2010 2009 2008 2007 2006 2005

ITC 34.33 33.13 31.36 32.77 31.7 33.39 34.99GPI 12.59 12.09 14.65 18.6 17.5 13.3 14.6VST 23.38 20.74 19.34 25.31 25.21 35.8 30.09

2005 2006 2007 2008 2009 20100

5

10

15

20

25

30

35

40

ITCGPIVST

•Return on Capital Employed

2011 2010 2009 2008 2007 2006 2005

ITC 44.94 42.64 34.6 36.60 37.24 27.41 18.74

GPI 24.74 19.31 21.99 23.58 24.19 36.26 33.09

VST 47.47 30.50 32.87 34.87 36.37 20.95 23.28

2005 2006 2007 2008 2009 20100

5

10

15

20

25

30

35

40

45

ITCGPIVST

•Return on Equity

2011 2010 2009 2008 2007 2006 2005

ITC 1.37 1.33 1.16 1.2 1.21 1.11 0.99

GPI 2.05 2.17 2.05 1.909 1.9 0.23 2.179

VST 2.27 2.04 1.6 1.5 1.67 1.73 1.88

2005 2006 2007 2008 2009 20100

0.5

1

1.5

2

2.5

ITCGPIVST

•Earning per share

2011 2010 2009 2008 2007 2006 2005

ITC 6.49 5.34 8.66 8.29 7.19 6.08 4.91

GPI 159.67 113.84 104.73 107.73 84.73 57.82 61.16

VST 61.53 40.18 40.04 37.79 35.68 46.76 34.98

2005 2006 2007 2008 2009 20100

20

40

60

80

100

120

ITCGPIVST

•Dividend per share

2011 2010 2009 2008 2007 2006 2005

ITC 4.45 10 3.7 3.5 3.1 2.65 31

GPI 35 25 25 25 25 22.5 22

VST 45 30 30 20 20 3 2.5

2005 2006 2007 2008 2009 20100

5

10

15

20

25

30

35

ITCGPIVST

•P/E Ratio

2011 2010 2009 2008 2007 2006 2005

ITC 28.2 24.7 24.9 20.9 32.1 18.2 18.2

GPI 12.5 17.8 7.2 12.5 14.2

VST 61.53 40.18 40.04 37.79 35.68 27.91 34.98

2005 2006 2007 2008 2009 20100

5

10

15

20

25

30

35

40

45

ITCGPIVST

Turnover Ratios•Fixed Asset Turnover Ratio

2011 2010 2009 2008 2007 2006 2005

ITC 1.69 1.58 1.44 1.59 2.42 2.31 2.01

GPI 3.18 3.31 3.18 3.41 6.15 4.82 4.38

VST 1.85 1.73 1.49 1.47 1.72 3.01 6.49

2005 2006 2007 2008 2009 20100

1

2

3

4

5

6

7

ITCGPIVST

•Inventory Turnover Ratio

2011 2010 2009 2008 2007 2006 2005

ITC 6.05 6.04 5.26 5.51 3.76 3.82 3.91

GPI 8.76 7.52 6.43 7.96 5.18 10.15 5.47

VST 5.94 6.31 7.52 10.24 12.62 6.05 5.56

2005 2006 2007 2008 2009 20100

2

4

6

8

10

12

14

ITCGPIVST

•Accounts Receivables Turnover Ratio

2011 2010 2009 2008 2007 2006 2005

ITC 23.91 24.31 21.32 20.43 20.79 18.22 20.07

GPI 33.58 35.24 41.93 45.82 56.81 95.67 90.96

VST 40.96 48.52 80.64 67.63 69.55 6.42 5.77

2005 2006 2007 2008 2009 20100

20

40

60

80

100

120

ITCGPIVST

ITC ONE OF INDIA’S MOST VALUABLE

CORPORATIONSOne of India’s premier private limited groups

completing 100 years.Large & established Distribution Networks.Annually turnover of the co. is RS 2888 Crore  It is one of the eight Indian companies to feature

in Forbes A-list in 2004.It has more then 21,000 employees at more then

60 location across India with 4,86,000 shareholders.

Ranks No. 4 among Indian listed Private Sector Companies by market cap. (@ April 09)

Rated as- one of India’s Most Respected Companies (IMRB-Business world Survey 2006)

SWOT Analysis Strength• Biggest and the largest

player in the Indian tobacco market with a market share of 80%.

• Its Gold Flake tobacco brand is the largest FMCG brand in India - and this single brand alone holds 70% of the tobacco market.

Weakness• It still has to consolidate

its foot in the cigar market largely dominated by Godfrey Philips.

SWOT Analysis Opportunities• ITC is moving into

new and emerging markets like developing countries of Eastern Europe, Africa etc.

Threats• The obvious threat is

from competition, both domestic and international.

• Health hazard• Increasing tax in

Cigarettes

Godfrey Phillips India ltd.The second largest player in the Indian

cigarette industry.Annual turnover exceeds INR 1800 crore

(approx. US $369.6 million)Has two major stakeholders, one of

India's leading industrial houses - the K. K. Modi Group and one of the world's largest tobacco companies, Philip Morris.

SWOT Analysis

Strength• The second biggest

tobacco company in India• The first and only tobacco

company to organize the fragmented cigar market in India and secure its position as the market leader in the cigar distribution.

• Partnering with some of the top most players in the international tobacco industry.

Weakness• low popularity of most of

its products• No sole authority

SWOT Analysis

Opportunities

• Already present in the Middle East, West Africa, South East Africa and South East Asia, GPI can strengthen its position as an international player by entering new markets.

• Even expanding market share in the Indian tobacco market is an opportunity

Threats• ITC getting into the cigar

market• It has a mere 12% in

market share

About VST Industries• VST Industries Ltd. is

a public conglomerate company headquartered in Hyderabad, India. The company manufactures and distributes cigarettes. Its Market Capitalization is 844.49, PE Value: 15.70 and Dividend: 5.49.The company has its registered office in Hyderabad. It started off as the formerly Vazir Sultan Tobacco Company, commonly known as VST and shares collobration with British American Tobacco group of the United Kingdom. It is fully independent and registered as VST Industries Ltd in the year 1983.