Indian Marlboro-maker falls amid government plan to ban FDI

Shares in India’s licensed producer of Marlboro-branded cigarettes fell 17 per cent on Tuesday on news of a government plan to ban all foreign direct investment and licensing of foreign brands in the tobacco sector.

India passed a law allowing 100 per cent foreign ownership of tobacco manufacturing operations in 1998, only to reverse course and ban foreign investment in such assets in 2010. Yet “technology collaboration” — which included the production of foreign-branded cigarettes under licence by local companies — was allowed to continue.

The commerce and industry ministry is considering banning such activity too, according to local media reports after the market closed on Monday, which was confirmed to the Financial Times by a government official with knowledge of the plans. It is a move that would contrast with broader efforts by the Narendra Modi administration to woo overseas investors.

News of the proposal prompted a 17.3 per cent drop in the share price of Godfrey Phillips, which manufactures Marlboro-branded cigarettes under licence from Philip Morris International.

In contrast, shares in the domestic market leader ITC — whose brands account for four out of every five cigarettes sold in India, according to Euromonitor — rose 2 per cent, as investors bet that it would benefit at the expense of foreign brands.

Local media cited informal government guidance that the proposal was part of a broader government plan to cut tobacco consumption in India.

But such an explanation did not make sense, said Sameer Deshmukh, an analyst at Reliance Securities, arguing that the move was likely to increase sales of illegally produced and imported cigarettes. These already account for about 20 per cent of the Indian cigarette market, according to Nomura.

India was the world’s sixth-biggest cigarette market by volume in 2014, with 96bn sticks sold, according to Euromonitor. Yet cigarettes account for only 5 per cent of the country’s tobacco market by volume — 20 per cent of consumption is through beedis, traditional hand-rolled cigarettes, while the remainder is consumed as chewing tobacco and other smokeless forms.

The push to restrict investment in tobacco would clash with liberalisation in other sectors, such as defence, insurance and retail, where the government has permitted greater foreign direct investment.

Mr Deshmukh said it was impossible to be sure of the government’s motives for considering the FDI ban in the tobacco sector. But he noted that the state-owned Life Insurance Corporation of India holds a significant stake in ITC, amounting to 14.4 per cent at the end of last year according to S&P Capital IQ.

The biggest investor in ITC, however, is British American Tobacco, which held roughly 30 per cent at the end of last year through various vehicles. In the 1990s BAT tried to secure a majority stake in ITC but was unsuccessful after it was strongly resisted by ITC management. The official with knowledge of the government plans did not indicate whether BAT’s investment would be affected.

Philip Morris owned 25.1 per cent of Godfrey Phillips at the end of last year, and reportedly has a 50.1 per cent stake in a joint venture established by the two companies for marketing purposes. There has been much speculation in Indian media recently that the US company was poised to expand these investments.

Additional reporting Jyotsna Singh