ITC IN | No Catalyst for PE Re-Rating in the Near Term

Smartkarma Webinar | ITC: Can It Re-Rate?

Gudang Garam (GGRM): Industry Consolidation Beneficiary

HM Sampoerna (HMSP IJ): The King's Struggle

HMSP (HMSP IJ): A Third of People in Populous Indonesia Smoke

Quick note: Valuation appears reasonable, time for a smoke

ASEAN Insight Provider

Jessica Irene

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Thematic (Sector/Industry)

Indonesia Tobacco / Thematic (Sector/Industry)

This is a joint insight with <a href="https://www.smartkarma.com/profiles/pranav-bhavsar" target="_blank" data-smartkarma-citation="accounts:3191" rel="noopener">Pranav Bhavsar</a> from the consumer team.India and Indonesia are two of the top five tobacco consuming country in the world, each with a very different market structure and dynamic. In this insight, we aim to capture a brief summary of both markets and conclude which of the three top tobacco players <a href="https://www.smartkarma.com/entities/itc-ltd" target="_blank" data-smartkarma-citation="entities:327:1" rel="noopener">ITC Ltd (ITC IN)</a>, <a href="https://www.smartkarma.com/entities/hm-sampoerna-tbk-pt" target="_blank" data-smartkarma-citation="entities:617:1" rel="noopener">Hm Sampoerna (HMSP IJ)</a> or <a href="https://www.smartkarma.com/entities/gudang-garam-tbk-pt" target="_blank" data-smartkarma-citation="entities:722:1" rel="noopener">Gudang Garam (GGRM IJ)</a> deserves to be in your Asian portfolio.India is the second largest producer and third largest exporter of tobacco in the world, providing 46mn employment. Tobacco is harvested mainly in two forms - cigarette tobacco and non-cigarette tobacco. During 2017-2018, non-cigarette tobacco alone had a ~69% market share. Only 7% of adult Indian males smoke cigarettes as compared to 14% who smoke bidis and 30% who use smokeless tobacco. The legitimate cigarette industry size in India, which was at 110bn sticks in 2011-2012 as per industry estimates, has dropped by 25% to about 83bn cigarettes in 2016-17. ITC, <a href="https://www.smartkarma.com/entities/vst-industries-ltd" target="_blank" data-smartkarma-citation="entities:16976:1" rel="noopener">Vst Industries (VST IN)</a> and <a href="https://www.smartkarma.com/entities/godfrey-phillips-india-ltd" target="_blank" data-smartkarma-citation="entities:16634:1" rel="noopener">Godfrey Phillips India (GP IN)</a>  are the only three listed entities in India which produce cigarettes. ITC Ltd. currently enjoys the highest market share (~84.27%), based on the sale. Rest of the share is distributed among minor companies like Kothari Products Ltd., Godfrey Phillips India Ltd., VST Industries Ltd., and others.Indonesia consumes tobacco primarily in the form of kretek cigarettes, a blend of tobacco and cloves. Smokeless cigarettes comprise a small market share under 2% according to the WHO data. 67% of men and 5% of women, comprising a total of 36% of the population consumes tobacco. The cigarette market volume in Indonesia has been falling for five consecutive years, driven by slow economic growth, steep excise increases, and downtrading to stronger cigarettes. The latest data point in 1Q19 show a 1% decline YoY versus 3-4% declines the previous years to a 310bn sticks run rate per annum. There are two investible cigarette manufacturers in Indonesia,  HMSP and GGRM. HMSP is the strongest in hand-rolled kretek and mild kretek segment, while its largest competitor GGRM has the biggest share in full flavor kretek. Together with PT Djarum (private company), the biggest three players comprise about three-quarters of the cigarette market. As a percentage of per capita GDP, cigarette taxes in India, of the most sold brand, are amongst the highest in the world. Average cigarette price per stick in India costs USD0.26 while in Indonesia it only costs about a third of the price at USD0.09 per stick. The legal cigarette industry in India, already reeling under the cumulative impact of steep increase in taxation over the previous five years in the pre-GST regime and intense regulatory pressures, was further impacted by a sharp increase of 13% in tax incidence on cigarettes (19% increase for the king-size filter segment) under the GST regime. Coupled with the increase in Excise Duty rates announced in the Union Budget 2017, this resulted in an incremental tax incidence of over 20% on cigarettes, post implementation of GST. While the legitimate cigarette industry has declined steadily since 2010-2011 at a compound annual rate of 4.8% p.a., illegal cigarette volumes in contrast have grown at about 5% p.a. during the same period, making India one of the fastest growing illegal cigarette markets in the world. The illegal, duty-evaded cigarette segment is estimated to be about 26 billion cigarettes in 2017, i.e., almost one-fourth of the industry.The tobacco excise taxation system in Indonesia is done on a multi-tier system based on three categories: cigarette types, production volumes, and the MSRP or the banderole price. The Indonesian excise system is one of the most complex cases in the world, consisting of 19 different tiers five years ago. The Ministry of Finance aims to simplify the taxation structure to just 5 tiers by 2021 in order to reduce the number of illicit cigarettes and under declaration of excise duties. Over the past five years, the Indonesian tobacco taxes have increased by about 8-10% rate per annum. However, given the low volume performance to date, and some political pressure from the presidential election, we have not seen any excise duty increases in 2019, which should bode well for volumes. Illicit cigarettes in Indonesia is estimated to comprise about 10% of the market or 30bn sticks according to the University of Gajah Mada survey, a steady share since 2012.  Given the specific Indonesian kretek taste preference, the rate of imported illicit cigarette is quite small and is estimated to be less than 2%. We expect ITC’s dominance to continue in the Indian cigarette industry, with expectations of double digit revenue growth over FY20 and FY21. The positives for ITC are that there will be no further hikes for the entire year, reducing possibility of any substantial price hikes due to taxation that could impact volume growth. Our forecast also estimates 14% and 17% top line and net profit Cagr for GGRM and 9% and 9% Cagr for HMSP, which are generally in line with consensus. Our numbers are factoring in 8% volume growth for GGRM in 2019 and 5% subsequent growth, and negative 3% for HMSP in 2019 and 3% subsequent growth. Details on each company and a comprehensive DuPont Analysis are further elaborated in this insight.

This is a joint insight with Pranav Bhavsar from the consumer team.India and Indonesia are two of the top five tobacco consuming country in the world, each with a very different market structure and dynamic. In this insight, we aim to capture a brief summary of both markets and conclude which of the three top tobacco players ITC Ltd (ITC IN), Hm Sampoerna (HMSP IJ) or Gudang Garam (GGRM IJ) deserves to be in your Asian portfolio.India is the second largest producer and third largest exporter of tobacco in the world, providing 46mn employment. Tobacco is harvested mainly in two forms - cigarette tobacco and non-cigarette tobacco. During 2017-2018, non-cigarette tobacco alone had a ~69% market share. Only 7% of adult Indian males smoke cigarettes as compared to 14% who smoke bidis and 30% who use smokeless tobacco. The legitimate cigarette industry size in India, which was at 110bn sticks in 2011-2012 as per industry estimates, has dropped by 25% to about 83bn cigarettes in 2016-17. ITC, Vst Industries (VST IN) and Godfrey Phillips India (GP IN)  are the only three listed entities in India which produce cigarettes. ITC Ltd. currently enjoys the highest market share (~84.27%), based on the sale. Rest of the share is distributed among minor companies like Kothari Products Ltd., Godfrey Phillips India Ltd., VST Industries Ltd., and others.Indonesia consumes tobacco primarily in the form of kretek cigarettes, a blend of tobacco and cloves. Smokeless cigarettes comprise a small market share under 2% according to the WHO data. 67% of men and 5% of women, comprising a total of 36% of the population consumes tobacco. The cigarette market volume in Indonesia has been falling for five consecutive years, driven by slow economic growth, steep excise increases, and downtrading to stronger cigarettes. The latest data point in 1Q19 show a 1% decline YoY versus 3-4% declines the previous years to a 310bn sticks run rate per annum. There are two investible cigarette manufacturers in Indonesia,  HMSP and GGRM. HMSP is the strongest in hand-rolled kretek and mild kretek segment, while its largest competitor GGRM has the biggest share in full flavor kretek. Together with PT Djarum (private company), the biggest three players comprise about three-quarters of the cigarette market. As a percentage of per capita GDP, cigarette taxes in India, of the most sold brand, are amongst the highest in the world. Average cigarette price per stick in India costs USD0.26 while in Indonesia it only costs about a third of the price at USD0.09 per stick. The legal cigarette industry in India, already reeling under the cumulative impact of steep increase in taxation over the previous five years in the pre-GST regime and intense regulatory pressures, was further impacted by a sharp increase of 13% in tax incidence on cigarettes (19% increase for the king-size filter segment) under the GST regime. Coupled with the increase in Excise Duty rates announced in the Union Budget 2017, this resulted in an incremental tax incidence of over 20% on cigarettes, post implementation of GST. While the legitimate cigarette industry has declined steadily since 2010-2011 at a compound annual rate of 4.8% p.a., illegal cigarette volumes in contrast have grown at about 5% p.a. during the same period, making India one of the fastest growing illegal cigarette markets in the world. The illegal, duty-evaded cigarette segment is estimated to be about 26 billion cigarettes in 2017, i.e., almost one-fourth of the industry.The tobacco excise taxation system in Indonesia is done on a multi-tier system based on three categories: cigarette types, production volumes, and the MSRP or the banderole price. The Indonesian excise system is one of the most complex cases in the world, consisting of 19 different tiers five years ago. The Ministry of Finance aims to simplify the taxation structure to just 5 tiers by 2021 in order to reduce the number of illicit cigarettes and under declaration of excise duties. Over the past five years, the Indonesian tobacco taxes have increased by about 8-10% rate per annum. However, given the low volume performance to date, and some political pressure from the presidential election, we have not seen any excise duty increases in 2019, which should bode well for volumes. Illicit cigarettes in Indonesia is estimated to comprise about 10% of the market or 30bn sticks according to the University of Gajah Mada survey, a steady share since 2012.  Given the specific Indonesian kretek taste preference, the rate of imported illicit cigarette is quite small and is estimated to be less than 2%. We expect ITC’s dominance to continue in the Indian cigarette industry, with expectations of double digit revenue growth over FY20 and FY21. The positives for ITC are that there will be no further hikes for the entire year, reducing possibility of any substantial price hikes due to taxation that could impact volume growth. Our forecast also estimates 14% and 17% top line and net profit Cagr for GGRM and 9% and 9% Cagr for HMSP, which are generally in line with consensus. Our numbers are factoring in 8% volume growth for GGRM in 2019 and 5% subsequent growth, and negative 3% for HMSP in 2019 and 3% subsequent growth. Details on each company and a comprehensive DuPont Analysis are further elaborated in this insight.

Tobacco Sector: Best of India and Indonesia