Hopes high for a moderate or even no tax hike on Cigarettes in the budget: Wadhera

Update on the Indian Equity Market:

On a much volatile session, Nifty see-sawed in both directions to end the day with a gain of 12 points to close at 12,356. The weekly F&O expiry might be the reason behind this volatility. Among the stocks, EICHERMOT (4.3%), NESTLEIND (3.4%) and ZEEL (2.8%) took the index higher whereas NTPC (-2.3%), INFRATEL (-2.0%) and JSWSTEEL (-2.0%) were the laggards. Within the sectoral indices, all but one index, METAL (-1.3%) traded in red while MEDIA (1.4%), REALTY (0.7%) and PHARMA (0.4%) were the biggest gainers.

Excerpts from an interview with Mr Bhisham Wadhera, CEO – Godfrey Philips India. The interview aired on CNBC-TV18 on 15^th January 2020.

• In the first half of FY20, the company witnessed a growth of 15% in Cigarettes business. The outlook for the remaining FY20E and FY21E depends on the outcome of Union Budget which will be presented on 1^st February 2020.
• The government has realized that moderate hike in taxes increases their revenue substantially. He is of the opinion that there will be moderate or no tax increase on Cigarettes in the coming budget.
• Though the cigarette industry is largely dependent on GST, the government introduced excise again in the last year. The company is not sure about how this will pan out in future.
• The domestic market share of the company increased from 11.7% in the last year to 12.8% and including Marlboro, it is coming at 13.5% right now. The bulk of this has been on the back of new markets in Andhra Pradesh & Karnataka. He said that the company has been successfully attacking the ITC bastions pretty strongly.
• The cess on tobacco is a subject of GST whereas the excise is a subject of Union Budget. There is a possibility of increase in the excise component. Last year, it was a nominal ₹ 5 per thousand cigarettes.
• The company has launched a Marlboro lower-priced version of regular size filter in Delhi two months ago. It is at par with Gold Flake premium of ITC. The early signs show it is doing reasonably well.
• From March- April, the company plans to expand its footprint in the North. As of now, the company operates through 100 stores. He plans to make a presentation to the board next month on the expansion plans. By the end of February, the expansion plan will be made public.

Consensus Estimate (Source: market screener and investing.com website)

• The closing price of GODFRYPHLP ₹ 1,397/- as of 16-January-2020. It traded at 20x / 17x the consensus EPS for FY20E / 21E of ₹ 71.4/ 83.3 respectively.
• Consensus target price of GODFRYPHLP is not available.