Although one in four of all adult Indians use tobacco, the country’s addiction runs far deeper. The government, too, has a toxic dependence. It’s called ITC Ltd.
Formerly known as Imperial Tobacco of India, later renamed India Tobacco Company, and finally truncated to just ITC, the 110-year-old conglomerate is 29.4% owned by British American Tobacco Plc. About 28.5% is controlled by various Indian state-run insurance companies and a government-controlled bad bank.
And therein lies the problem. The large quasi-state ownership is acting as a value trap. It’s preventing the $25 billion enterprise from being carved up into a pure cigarette company, owned by BAT, and a supply-chain platform like China’s Pinduoduo Inc., which is nearly four times bigger in enterprise value. It’s a missed opportunity, not just for ITC’s minority shareholders, but for India.
Now that the country is giving farmers the freedom to sell their produce outside state-designated market yards, a corporate buyer like ITC that has distribution capabilities in the smallest of Indian towns (thanks to cigarettes) has a shot at building a meaningful digital, agri-business franchise. One that’s able to obtain better prices for producers.
A cash-strapped New Delhi, which is delaying fiscal support to an economy expected to lose a 10th of its real output this year to Covid-19, also needs to rethink its stance: What additional harm will befall if BAT wins ITC’s successful cigarette division, paying a hefty control premium to acquire smokers, a vanishing breed in developed markets?
In return, India can wrest a time-bound commitment from the new owner to steer the revenue toward, say, 25% reduced-risk products like the Swedish snus and heat-not-burn devices. That will mean a fall in future healthcare costs from lower tar consumption. ITC scored 0.62 in Foundation for a Smoke-Free World’s 2020 Tobacco Transformation Index, better than China National Tobacco Corp., but way behind BAT, Philip Morris International Inc. and Swedish Match AB. “Companies that offer reduced-risk products are mostly focusing their efforts on selected high/medium income countries, where overall smoking rates are lower and cigarette sales are already declining,” says the new study. India can negotiate a better outcome with BAT.
This article first appeared in Bloomberg Quint. Read the full story here.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.