Cigarette stocks beat benchmarks on account of stable tax structure

The Indian benchmark indices have seen it all over last one year. The markets registered large volatility and faced many issues such slow consumption, declining economy, and unsupportive macro data. However, the one sector, which seem to have beaten the benchmarks, is cigarette stocks.

The major share in the huge Indian cigarette market in urban area is ruled by ITC Ltd. The ITC has nearly 45 per cent share of cigarette sales in total consolidated revenues. The sales numbers for recent quarter of this segment saw growth of 6 per cent on YoY basis. While since, December 2018, the sales have grown at a CAGR of 5 per cent till the latest quarter ended September 2019.

In case of other major players, such as VST Industries and Godfrey Philips the trend is same. The CAGR sales growth for Godfrey Philip till September 2019 was 2.5 per cent from December quarter ended in 2018. VST Industries saw CAGR sales growth of less than 1 per cent during same period.

The stock price returns, though, show different trend. The average return of these three companies since last December for the year is 20 per cent as against 14 per cent Sensex returns during this same period. The ITC Ltd, declined 13 per cent but VST and Godfrey Philip gained 33.15 per cent and 39.06 per cent, respectively.

The slow volumes are justified by relaxed taxation norms since 2017. The GST implementation certainly helped the cause as ill legal volumes have declined. The higher pricing power can be taken as key trigger for these companies.