Chapter 1

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1.1.

Introduction of tobacco industry

The tobacco industry is one of the most profitable industries in the world. Tobacco companies use their enormous wealth and influence both locally and globally to market their deadly products. In India, the tobacco industry is divided into three distinct and powerful sectors: bidis (smoking products hand-rolled in tendu leaves), smokeless tobacco (mainly chewing tobacco) and cigarettes. Bidis are the most popular tobacco products consumed in India- 48% of the market. Smokeless tobacco makes up 38% and cigarettes only 14% of the market. Some aspect of the tobacco industry, whether it is tobacco farming, manufacturing, or distribution, is present in every Indian state, making tobacco control a truly national effort. The tobacco industry in India has sections on each of the tobacco sectors as well as examples of tobacco promotion, sponsorship and corporate social responsibility efforts designed to increase consumption and industry profits. 1.1.1. History of tobacco

Tobacco has a long history in the Americas. The Mayan Indians of Mexico carved drawings in stone showing tobacco use. These drawings date back to somewhere between 600 to 900 A.D. Tobacco was grown by American Indians before the Europeans came from England, Spain, France, and Italy to North America. Native Americans smoked tobacco through a pipe for special religious and medical purposes. They did not smoke every day. Tobacco was the first crop grown for money in North America. In 1612 the settlers of the first American colony in Jamestown, Virginia grew tobacco as a cash crop. It was their main source of money. Other cash crops were corn, cotton, wheat, sugar, and soya beans. Tobacco helped pay for the American Revolution against England. Also, the first President of the U.S. grew tobacco. By the 1800's, many people had begun using small amounts of tobacco. Some chewed it. Others smoked it occasionally in a pipe, or they hand-rolled a cigarette or cigar. On the average, people smoked about 40 cigarettes a year. The first commercial cigarettes were made in 1865 by Washington Duke on his 300-acre farm in Raleigh, North Carolina. His hand-rolled cigarettes were sold to soldiers at the end of the Civil War.

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It was not until James Bonsack invented the cigarette-making machine in 1881 that cigarette smoking became widespread. Bonsack's cigarette machine could make 120,000 cigarettes a day. He went into business with Washington Duke's son, James "Buck" Duke. They built a factory and made 10 million cigarettes their first year and about one billion cigarettes five years later. The first brands of cigarettes were packaged in a box with baseball cards and were called Duke of Durham. Buck Duke and his father started the first tobacco company in the U.S. They named it the American Tobacco Company. The American Tobacco Company was the largest and most powerful tobacco company until the early 1900's. Several companies were making cigarettes by the early 1900's. In 1902 Philip Morris Company came out with its Marlboro brand. They were selling their cigarettes mainly to men. Everything changed during World War I (1914-18) and World War II (1939-45). Soldiers overseas were given free cigarettes every day. At home production increased and cigarettes were being marketed to women too. More than any other war, World War II brought more independence for women. Many of them went to work and started smoking for the first time while their husbands were away. By 1944 cigarette production was up to 300 billion a year. Service men received about 75% of all cigarettes produced. The wars were good for the tobacco industry. Since WW II, there have been six giant cigarette companies in the U.S. They are Philip Morris, R.J. Reynolds, American Brands, Lorillard, Brown & Williamson, and Liggett & Myers (now called the Brooke Group). They make millions of dollars selling cigarettes in the U.S. and all over the world. In 1964 the Surgeon General of the U.S. (the chief doctor for the country) wrote a report about the dangers of cigarette smoking. He said that the nicotine and tar in cigarettes cause lung cancer. In 1965 the Congress of the U.S. passed the Cigarette Labeling and Advertising Act. It said that every cigarette pack must have a warning label on its side stating "Cigarettes may be hazardous to your health." By the 1980's, the tobacco companies had come out with new brands of cigarettes with lower amounts of tar and nicotine and improved filters to keep their customers buying and to help reduce their fears. The early 1980's were called the "tar wars" because tobacco companies competed aggressively to make over 100 low tar and "ultra" low tar cigarettes. Each company made and sold many different brands of cigarettes.

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In 1984 Congress passed another law called the Comprehensive Smoking Education Act. It said that the cigarette companies every three months had to change the warning labels on cigarette packs. It created four different labels for the companies to rotate. Since the 1980's, federal, state, local governments, and private companies have begun taking actions to restrict cigarette smoking in public places. The warning labels were the first step. Tobacco companies cannot advertise cigarettes on television or radio. It is against a law that was passed by Congress in 1971. Many cities across the U.S. do not allow smoking in public buildings and restaurants. Since 1990, airlines have not allowed smoking on airplane flights in the U.S. that are six hours or less. State taxes on cigarettes have increased. As it becomes more difficult for tobacco companies to sell their products in the U.S., they are looking outside. U.S. tobacco companies are now growing tobacco in Africa, South America (Brazil and Paraguay), India, Pakistan, the Philippines, Greece, Thailand, and the Dominican Republic. Fifty percent (50%) of the sales of U.S. tobacco companies go to Asian countries, such as Thailand, South Korea, Malaysia, the Philippines, and Taiwan.

1.2.

History of Indian tobacco industry

India is the worlds second largest producer of tobacco. Endowed with rich agro-climatic attributes such as fertile soils, rainfall and ample sunshine, India produces various types of to b a cc o . Currently, Indian tobacco is exported to more than 80 countries spread over all the continents. A few of the top multinational companies such as British American Tobacco (BAT), Philip Morris, RJ Reynolds, Seita, Imperials, Reemtsma etc. and many companies with government monopoly all over the world import Indian tobacco either directly or indirectly. The Indian market for tobacco products, however, has some characteristics rather different from most other markets. India has a large, highly integrated tobacco industry, involving the growing of a range of leaf types, the manufacture of different tobacco products, including unprocessed and chewing tobacco, and an extensive distribution and retail system. Over the years, a combination of strong prices, domestic consumption, good export demand for tobacco and low prices of other crops helped the growth of tobacco from a cash crop to a manufacturing 4|Page

industry linked with commercial considerations. The tobacco industry in India includes the production, distribution and consumption of

leaf tobacco, smoking products such as cigarettes and beedi and Various chewing tobacco products.

It presents policy-makers with an unenviable dilemma. On the one hand, it is a robust and largely irrigation-independent crop, provides substantial employment, has significant export potential and most importantly, is a source of ever-growing tax revenues. On the other, there are public health concerns about the effects of smoking and consumer-led lobbies asking for more controls on cigarette sales, smoking and advertising. In spite of its proven adverse implications for public health, the industry continues to be supported in many quarters on the grounds of its contribution to employment and national production. The organized sector of the industry, dominated by multinational corporations, is at the forefront of canvassing support for the sector. 1.2.1 Economic history of Indian tobacco industry The immediate and tangible benefits that accrue from tobacco cultivation, manufacture and marketing act as incentives for farmers to grow tobacco and for the government to encourage tobacco cultivation and manufacture. Tobacco has developed from a commodity to which great importance and value were attached (because of its presumed medicinal and evident intoxicant properties), and hence used for barter trade during the sixteenth and seventeenth centuries, to a cash crop in subsequent periods. The following aspects of tobacco can help in understanding why it has developed as a cash crop: 1. 2. 3. 4. 5. Tobacco has been contributing substantially to the total agricultural income. It yields high net returns per unit of cultivation as compared to other crops. It provides employment opportunities, both in agriculture and activities involved in It is a major foreign exchange earner. It is an important source of revenue, which can be tapped relatively more easily 5|Page

the manufacture of tobacco products.

than many other commodities. In view of its special qualities, a levy on it does not cause marked substitution effects and what the noted fiscal expert, Richard Musgrave terms the spite effects.35 Therefore, in practically every fiscal budget in India, the finance minister proposes raising a levy on tobacco products and justifies it on the ground that tobacco consumption is injurious to health. 6. There is considerable domestic and inter- national demand for tobacco and its products. The historical developments relating to the economic aspects Independence period of national governance and policy-making. Pre independence period Tobacco was initially grown in the Deccan region (South Central India ), during 1605, and l a t e r spread to other parts. The Virginia variety of tobacco was introduced in India in Andhra Pradesh in 1920 by the British officers of the Indian Leaf Tobacco Development Company. Sir Forbes Watsons Cultivation and preparation of tobacco in India (1871), said to be one of the earliest publications on tobacco, tells us more about Indian tobacco. The area under tobacco cultivation increased three times during the period from of tobacco in India can be

studied in two periods: the colonial era before India became independent in 1947 and the post-

18911892 to 19201921. Since then, the area under tobacco cultivation has been hovering around four lakh hectares. There was a great demand for tobacco, particularly cigarettes, by 1920. Since cigarettes were not manufactured in India, imports increased to meet the domestic demand. Revenue from tobacco increased six times, while the value of imports increased 26 times during a period of 40 years. Post independence period Although tobacco was grown in many parts of India during quality the 1950s, the best

crop was grown in Bihar, West Bengal, Tamil Nadu, Karnataka, Maharashtra, 6|Page

Punjab and Andhra Pradesh . Cultivation of flue-cured Virginia (FCV) tobacco spread to Tamil Nadu (19571958), Maharashtra (19611962) and West B e n g a l ( 1966). Till the1960s, the cultivation of FCV tobacco was traditionally confined to the black soils in India. However, with increasing demand for light- bodied leaves and low n i cot i n e /tar content, its cultivation was extended to Karnatakas light soils. Madras (now Chennai) was leading in the area under tobacco cultivation until the formation of Andhra Pradesh in 1953. West Bengal was also one of the leading producers before 1947. The area under tobacco cultivation increased within the first 20 years of Independence. There was a steep reduction in the area in 19751976, by 19801981, the area under cultivation increased by 22%. This increase was the result of initial efforts taken by the Tobacco Board set up in 1975. The reduction in crop area, observed in 2001, was due to a crop holiday observed in Andhra Pradesh. This was in response to an unsold surplus of tobacco produce from the preceding years. These fluctuations have occurred only in the tobacco growing regions of India. Overall, the area under cultivation has been limited to four lakh hectares, because of the non-suitability of the soil for tobacco cultivation in other parts of India. From 1951 to 2001, there was an increase in the production by 130%, in excise revenue by 31,614%, in export revenue by 5823% and in consumption by 92%. The worldwide trend in the area of tobacco cultivation and production shows that while there has been a relatively modest growth in the area under tobacco cultivation, a steady growth in the production area has taken place, pointing to substantial productivity gains. There has also been a shift in tobacco production from the developed to developing countries. Indias share in the world tobacco production was 10.2% in 2000, while that of China was 36.7%. However, in terms of productivity, India has always remained much below the world average by 20%40%. An analysis of variety-wise tobacco production reveals that the bulk of total tobacco production in India consists of noncigarette tobacco products as there is a strong, but unorganized, domestic market for non-cigarette tobacco products. Production of cigarette tobacco, mainly FCV, though increasing, still accounts for only 30% of the total production in the country. This is because of the 200 million tobacco consumers in India, only 13% consume it in the form of cigarettes, while 54% consume it in the form of beedi and the rest in raw/ gutka forms.43 Worldwide, 85% of the tobacco cultivated 7|Page

is used in the production of cigarettes. Hence, the tobacco consumption pattern in India markedly differs from the rest of the world in terms of product configuration. A special feature of the domestic tobacco production scene in India is the varietal composition of the produce. India is the only country where the bulk of production consists of numerous nonsmoking types of tobacco. The presence of a strong domestic demand for beedi, hookah, and chewing and snuff tobacco necessitates the cultivation of non-cigarette types of tobacco to a relatively large extent. An analysis of variety- wise production of tobacco shows that during 19971998, beedi accounted for 29.6% of the total area under tobacco cultivation and 29.5% of the total production, whereas Virginia tobacco used in cigarettes was grown on 39.1% of the area under tobacco cultivation and accounted for 23.6% of the total production. However, the share of chewing tobacco in Indias tobacco production has risen steadily over the years from 11.7% in 19931994 to 29.1% in 19971998.

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Chapter 2

2.1 Market Scenario of Indian Tobacco Industry The Indian tobacco industry is divided into three distinct and powerful sectors: bidis (smoking products hand- rolled in tendu leaves), smokeless tobacco (mainly chewing tobacco) and 9|Page

cigarettes. Bidis are most popular tobacco products consumed in India 48 % of the market. Smokeless tobacco makes up 38% and cigarettes only 14% of the market. Some aspect of the tobacco industry, whether it be tobacco farming, manufacturing, or distribution, is present in every Indian state, making tobacco control a truly national effort. This report, like the tobacco industry in India, has sections on each of the tobacco sectors as well as examples of tobacco promotion, sponsorship and corporate social responsibility efforts designed to increase consumption and industry profits Phases in Manufacture of Tobacco 1. Planting 2. Harvesting 3. Curing 4. Manufacture 1. Planting Seed sown in nursery. Later transplanted after 6-8 inches tall. Soil is enriched and fertilized. Pesticides are sprayed or crop is dusted. The plants grow 4-6 feet in height. The plant is pruned of dead stems and leaves. Healthy plants have 9-20 leaves and are about 24-30 inches length. 2. Harvesting Harvesting after 70-90 days of transplanting with the precaution of sun burn. Priming: The hand picking technique. Stalk cutting: Cutting close to the root. Separation of leaves for Cigar, Cigarettes and Pipe Tobacco. 3. Curing of tobacco

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Curing is a process of drying and removal of the sap. It improves the aroma and heightens the flavor. Methods of Curing Flue Curing. Air Curing. Fire-curing Sun Curing Flue curing In a barn Tiers of Poles hung lengthwise. Flues are ducts that carry heat pumped in at 170 * F which makes the tobacco leaves dry and brittle. The process lasts 4-5 days. The leaves are then separated as firsts, seconds and lugs depending on quality. The seconds form the bulk of the production. The leaves are spread out on the floor and allowed to ferment for 3-4 weeks. Flue cured tobacco is largely for cigarettes. Air The process uses air to cure the leaves. The leaves are placed on unsheltered platforms. The barn has ventilators and temperature and humidity is controlled. Temperature of 65-75*F is maintained. Under good conditions 4-5 days are good enough for the curing process to be executed. Chewing tobacco is largely made using this method. Fire Fire cured tobacco is hung in large barns. or intermittent low smolder and takes between here fires of hardwoods are kept on continuous three days and ten weeks, depending on the process and the tobacco. Fire curing produces a tobacco low in sugar and high in nicotine. Pipe tobacco, chewing tobacco, and snuff are fire cured. Flavored tobacco is also made the same way. Sun 11 | P a g e

Sun-cured tobacco dries uncovered in the sun. This method is used in Turkey, Greece and other Mediterranean countries to produce oriental tobacco. Sun-cured tobacco is low in sugar and nicotine and is used in cigarettes 4. manufacturing Freshly cured tobacco has a bitter and sharp aroma. Tobacco is stored in barrels for 2-3 years before the manufacturing. During this some water is added to maintain the moisture content and keeping the leaves brittle. This process makes the leaves sweeter and the flavor becomes mild reducing the nicotine content. Flavorings can be added like honey, liquorices, menthol, glycerin maybe added to moisten tobacco

2.2 The Bidi Industry Bidis are slim hand-rolled, unfiltered cigarettes that are rolled in brown tendu or temburni leaves held together by a string. The product is often flavored, and in general bidis are stronger tasting than regular cigarettes. Bidis are cheaper than cigarettes which makes them very popular in rural areas and among the poor. While bidis are the number one tobacco product used in India, very little is actually known about the organization of the bidi industry. Bidi production is fragmented and because most brands are hand-rolled in individual homes on a small scale, the bidi industry is considered to be a cottage industry.

In 1995 the Ministry of Statistics and Programme Implementation estimated there were over 6,600 bidi manufacturers in India, compared to 40 cigarette factories and 55 smokeless tobacco factories. While recent numbers are not available, it is still clear that bidi manufacturers greatly outnumber other types of product manufacturers.

A woman sitting at home rolling 100 sticks a day qualifies as a bidi factory. 12 | P a g e

The bidi manufacturing industry is divided into two different sectors: organized and unorganized. The organized sector is factory based and production is increasingly mechanized; and the unorganized sector is made up of home-based production and small cooperatives. Most production and hand-rolling is done at home by women and children. Tobacco industry analyst, Euromonitor International, estimates that 20% of bidis are Even organized factories tend to outsource production to individual homes.

produced in the organized sector and 80% in the unorganized sector.

Because the bidi industry is fragmented there are no specific figures on how many bidis are sold or produced. It is estimated that 750 billion to 1.2 trillion sticks are produced annually. According to Euromonitor International, the bidi industry in India is worth Rs200 billion ($4.1 billion USD). Bidis are much cheaper than cigarettes and smokeless tobacco products due mainly to unequal levels of taxation on the different products. Bidis cost between Rs2.50-5.00 for 25 sticks (less than one Rs per stick) whereas the leading brand of gukta costs Rs3-4 per unit. The leading brand of cigarettes costs Rs 80-88 for 20 sticks (Rs4-4.4 per stick). In 2009, Euromonitor reported that bidi volume sales were down 5% from the previous year because of a ban on smoking in public places. Despite being fragmented, the bidi industry still has a powerful voice in Indian politics which keeps taxes on bidi products low and regulations lax. The major lobbying organization for bidis is the All India Bidi Federation which represents the entire bidi industry. Other organizations that lobby nationally and regionally for the bidi industry include: All India Beedi, Cigar & Tobacco Workers Federation (New Delhi) Karnataka State Beedi Workers Federation S.K.Beedi Workers Federation Karnataka Beedi Industry Association Mumbai Beedi Workers Union (Maharashtra) All Bengali Beedi Workers and Employees Federation (Calcutta)

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According to Euromonitor International, no single bidi company or brand has more than a 5% market claim. Large bidi producers have their own territory (state or district) where they dominate the market with little competition from other bidi companies. There are a few regional players that sell their bidi brands in more than one state or district, including Ganesh Beedi Works, Kajah Beedi Co and Bharat Bidi Works. There is no national bidi brand and at one time it was estimated that there were over 300 different brands across India. Some notable brands include: 502 Pataka produced by Pataka Biri Manufacturing 501 Ganesh produced by Magalore Ganesh Beedi Works Top regional brands such as Dinesh in South India, Taj in North India, and Howrah in East and Northeast India. While bidi production is concentrated in the west and south of India, it has also been estimated that each state has around 200 bidi manufactures.

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Table 2.1 Leading Bidi Companies and Brands Company Name Bharath Beedi Works Kerala Dinesh Beedi Workers Cooperative Location Mangalore Production and Distribution Produces 60 million bidis a day Popular in North and West India Part of the Bharath Group Produces 30 million bidis a day Produces 1.8 billion bidis annually 18 different societies (companies) Market covers Kerala, Tamil Nadu and Karnataka Cooperative is sponsored by the Kerala government and includes bidi rolling, food processing, umbrella assembling, clothing and IT Produces 20 billion bidis annually Claims to produces 30% of the bidis in the organized sector Network of 30 branches Popular Brand (s) Thirty Brand Beedies

Kerala

Kerala Dinesh Beedi

Mangalore Ganesh Beedi Works

Tamil Nadu Karnataka

501

Pataka Biri Manufacturin g Co Ltd Rajah Group (Kajah Beedi Group)

Delhi

Produces 100 million bidis a day Has 10 factories (2004)

502 Pataka Biri

Tamil Nadu Kerala Maharashtr a

Cooperative of four different companies

Kajah Beedi Action Beedi

(Source 2010 Euromonitor International)

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2.3Smokeless Tobacco
Popular among rural and urban consumer, smokeless tobacco is also much more popular among woman than smoking. The smokeless industry in India is highly fragmented - some products are commercially manufactured but many are made in the home and sold locally. Smokeless tobacco products in India include khaini, gutka, mawa, gudhaku, and zarda. Table 2.2 Types of Smokeless Tobacco Type of Smokeless Tobacco Khaini/ Kharra Gutka (Gutkha) Description Mixture of sun-dried tobacco and lime. A dry mixture of crushed areca nut, tobacco, catechu (spices), lime, aromas and flavourings as well as other Pan Masala Mawa Gudhaku Zarda additives.term for areca nut product. Does not usually General contain tobacco and is often confused with Gutka. Uses shavings of areca nut, tobacco and lime. A paste made of tobacco and molasses. Raw tobacco that is scented using spices such as saffron. (Source 2010 Euromonitor International) Another product, pan masala, is often confused with gutka because it is packaged the same but it does not contain tobacco. In a recent Global Adult Tobacco Survey, it was reported that khaini is the most commonly used tobacco product in India, followed by gutka. However, according to Euromonitor International, Gutka is the most popular form of chewing tobacco sold in India and is estimated to account for approximately 80% of chewing tobacco total volume sales. This discrepancy is mainly a difference between actual prevalence of use and what Euromonitor International is able to measure in terms of volume. More people in India report using khaini, but gutka companies such as Dharwal Industries are larger and more organized and therefore more likely to report product sales. In general, smokeless tobacco products are very cheap and are sold in single use packets for Rs1-3 16 | P a g e

(less than one cent US).Unbranded smokeless products, including unbranded khaini,, are common, keeping the products cheap and unregulated. In India, retail volume sales of smokeless tobacco products increased by 82% between 1999 and 2009.After a 2008 smoking ban and tax increase on unfiltered cigarettes, chewing tobacco sales increased by 6.5% as low-income smokers switched to cheaper smokeless products. Table 2.3 India Smokeless Tobacco Market Size - Retail Volume (000- Tonnes) 1999 352 2000 380.1 2001 404.8 2002 425.1 2003 454.8 2004 484.4 2005 506.2 2006 2007 2008 2009 539.1 566 600 639 (Source 2010 Euromonitor International)

Leading Companies and Popular Brands The smokeless tobacco industry in India is controlled by a few large national companies and many different regional players. The top five companies account for 31% of sales, the rest is controlled by regional players that often only operate in one district in a state. In general, Indian smokeless tobacco users prefer to buy locally. Table 2.4 Smokeless Tobacco Company Shares Retail Volume (%) Smokeless Tobacco Company Shares Retail Volume (%) Company Name Dhariwal Industries Ltd 2003 11.8 8.8 2004 12 9.3 2005 12 9.5 2006 12.3 8.8 2007 12.3 7.8 2008 12.5 7 2009 12.5 7.2

(Manikchand Group) Dharampal Satyapal Ltd (DS Group) Som Sugandh Industries Ltd Shree Meenakshi Food 4.3 2.5 4.2 2.8 4 2.8 4.7 3 5 3 5.5 3.2 6 3.5

Products Pvt Ltd Kothari Products Ltd Others 4.2 68.4 4.3 67.4 4.3 67.4 4 67.2 3.5 68.4 2.8 69 2 68.8

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(Source 2010 Euromonitor International)

Market Share of Top India Smokeless Brands Retail

Volume (%) Brand

Company 2009

name

RMD Gutkha Dilbagh Tulsi Baba Goa Pan Parag

Dhariwal 12.5 Som 6 Dharampal 3.7 Dharampal 3.5 Shree 3.5 Kothari 2 Products Meenakshi Food Sugandh

Industries Industries Satyapal Satyapal Products

Most smokeless tobacco companies in India just produce one brand. Different flavour varieties and packaging sizes are sold under the one brand name. The brand name is also often used to sell a non-tobacco pan masala product. Uniting a tobacco product and non-tobacco product under one name is a clever marketing technique, as India has an advertising ban in place that prevents the direct advertising of tobacco products. Tobacco products that are packaged identically to pan masala benefit from the association made between the two products.

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Dhariwal IndustriesAs one of the oldest smokeless tobacco companies in India, it is also currently the market leader.The company is part of the Manikchand Group which also has interests in packaging, bottled water, power and real estate among other things. Dhariwal Industries manufactures its products in Vadodara, Pune and Bangalore. Dhariwal Industries produces gutka under the brand name RMD which is the number one seller in India. The company also uses the RMD name for pan masala. Dharampal SatyapalThe second largest smokeless tobacco company in India. Dharampal Satyapal is part of the DS Group which also has interests in food and beverages, packaging, hospitality and hospitality industries, among others. The DS Group manufactures tobacco products in Agartala, Tripura. Produces two smokeless tobacco brands- Tulsi (gutka) and Baba (zarda). Also produces pan masala under the Baba name.

Som Sugandh IndustriesAlso known as the Dilbagh group, the company is the third largest smokeless tobacco company in India. The Dilbagh Group is based in New Delhi. The company produces three smokeless tobacco products- the second most popular Dilbagh brand (gutka), Talab (gutka) and Hot (khaini). All three brands are also used to sell pan masala. 19 | P a g e

 Talab Gutkha in particular is packaged in attractive sachets making it a hot favourite among youth across all income groups. Kothari ProductsAlso known as Pan Parag India, and was established in 1973. Most visible product is the Pan Parag brand which is used to sell gutka bu whose main product is pan masala.

2.4 The Cigarette Industry

Cigarette consumption makes up a small portion of the tobacco market in India, only 14% of tobacco products sold are cigarettes. Retail volume sales have decreased by 9% in the last ten years from 99.6 billion sticks in 1999 to 90.3 billion sticks in 2009. Recent declines in cigarette volumes are mainly due to a 2008 increase in the tax on unfiltered cigarettes. The tax increase has also led to many unfiltered brands being removed from the market. ITC Ltd stopped unfiltered cigarette production entirely and some companies have launched filter versions of their most popular unfiltered brands to maintain their customers. Table 2.5 India Cigarette Market Size- Retail Volume (billion sticks) 1999 99.6 2000 98.7 2001 89.3 2002 91.9 2003 94.5 2004 96.5 2005 100 2006 2007 2008 2009 101.1 99.8 91.2 90.3 (Source 2010 Euromonitor International)

Despite recent declines in sales, it is expected that cigarette use will increase overtime as disposable incomes increase in India. Euromonitor International predicted in 2008 that if the smokers who currently smoke bidis switched to factory made cigarettes, then Indias cigarette consumption would increase to around 640 billion sticks. This increase would make India the second largest volume cigarette consumer in the world behind China. Table 2.6 Cigarette Company Shares Retail Volume (%) Cigarette Company Shares Retail Volume (%) 2003 2004 2005 2006 2007 2008 2009

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ITC Group Godfrey Phillips India Ltd VST Industries Ltd Golden Tobacco Ltd GTC Industries Ltd Japan Tobacco Inc Gallaher Group Plc** Others Total

66 10.9 9.4 9.4 2 2.2 100

66.1 11.9 8.9 9.4 1.5 2.2 100

67.5 11.1 8.7 9.2 1.4 2.2 100

67.8 67.9 71.8 72.9 11.5 11.9 12.9 13.8 8.4 8.5 8.5 8.7 3.6 1.5 9 8.6 1.3 1.4 1.3 1.3 1.9 1.8 1.9 1.7 100 100 100 100 (Source 2010 Euromonitor International)

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The cigarette market in India is controlled by four locally established companies, but most companies also have close ties to international tobacco companies. The leading transnational tobacco companies (TTC) have recently attempted to increase their shares of the Indian cigarette market but have had little success. The ability of TTCs to increase their presence in India has in part been limited because of restrictions on foreign direct investment (FDI) in cigarette manufacturing. ITC GroupITC was established in 1910 under the name Imperial Tobacco Company of India. The company changed its name to ITC in 2001 to reflect its diverse interest in products outside of tobacco. ITC is the leading cigarette manufacturer in India with 73% of the market in 2009. Since 2001, ITC has steadily increased its market share in India and has increased cigarette production by 15% from 57.1 billion sticks in 2001 to 65.8 billion sticks in 2009. Reportedly, the Indian government has a stake in ITC. While ITC claims that the state does not have any direct shares, the company does report that a large number of ITC shares are held by financial institutions which are majority state owned such as the Life Assurance Corporation of India and Unit Trust of India. The TTC British American Tobacco (BAT) has also has a 32% share. ITC generated RS 262.6 billion ($US 28.9 million) in revenue in 2009 through its interest in cigarettes, hotels, cosmetics and toiletries, packaged food, apparel, paperboards and packaging, and agriculture. ITCs cigarette industry contributed to 66% of the companys total revenue for the fiscal year ending March 2010. ITC has five cigarette factories in Bangalore, Kolkata, Munger, Ranjangaon, and Saharanpur. In addition to its operations in India, ITC also has cigarette subsidiary Surya Nepal, which is a joint venture with British American Tobacco.

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Godfrey Phillips India-

Established in India in 1936 as an import company for Godfrey Phillips, UK. The company has since established itself as a major local manufacture of cigarettes in India. Godfrey Phillips is the second largest cigarette company in India with 14% of the market. Since 2001, the company has seen continuous growth in market share and has increased its cigarette production by 43% from 8.7 billion sticks in 2001 to 12.5 billion sticks in 2009. Godfrey Phillips India has two major stake holders - the KK Modi Group, an industrial conglomerate based in Mumbai, and the international tobacco company Philip Morris International (PMI) which together hold a total of 71% of the company. In May 2009, KK Modi acquired an additional 10.8% stake in Godfrey Phillips from PMI, bringing its total share to 47% and PMIs to 25%. Godfrey Phillips India has a leaf division that provided tobacco leaf for production incountry and for export. The company also sells tea. The cigarette segment accounted for 92% of Godfrey Phillips India revenue for the financial year ending March 2010. Godfrey Phillips is headquartered in New Delhi and has factories in Ghaziabad (near Delhi) and Andheri (near Mumbai). Currently, a new factory is being built in Rabale. The company has a strong presence in North and West India, and in an attempt to increase the companys reach in India, Godfrey Phillips is aggressively expanding distribution into the states of Tamil Nadu and Orissa.

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VST Industries-

Established in 1930. Before the company changed its name to VST Industries in 1984, it was known as the Vazir Sultan Tobacco Co. VST Industries is the third largest cigarette company in India with 9% of the market. Between 2001 and 2009 the company lost market positioning and saw a 28% decrease in volume sales. Since 2008, declines in growth have reversed. VST Industries reported a 4.5% increase in volume production for the fiscal year ending in March 2010, as well as record profits. VST Industries is an affiliate of BAT, which holds a 32% stake in the company. The company sells economy priced cigarettes, and has a strong presence in South India. Besides cigarettes, VST Industries also sells unmanufactured and cut tobacco leaf. VST Industries has a manufacturing facility located in Andhar

Golden Tobacco-

Established in India in 1930 as the first wholly-owned Indian tobacco company in the country. Formally known as GTC Industries, renamed Golden Tobacco after demerging from its retail business in 2008. Golden Tobacco is the fourth largest cigarette company in India with 1% of the market. In 2001, the company controlled 10% of the cigarette market but saw a dramatic decline in market share and production in 2008 after the tax increase on unfiltered cigarettes. In 1979, the company was acquired by Dalmia Group which also has interests in telecommunications, chemicals, and textiles. The Dalmia group holds a 36% share of the company. The company has two major production facilities in Mumbai and Baroda.

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Transnational Tobacco Companies (TTC) Presence in India The expansion of TTC in India has been limited by restrictions on FDI by cigarette companies in the country. However, as described previously, three of the top international tobacco companies currently have stakes in local manufactures. Despite restrictions, TTCs continue to focus on India because of the potential growth of the cigarette market. British American Tobacco (BAT) BAT is a British company headquartered in London, England. BAT is ranked third in the global tobacco market. BAT is a stakeholder in ITC and VST Industries and owns approximately 32% of each tobacco company. BAT attempted to increase its stake in ITC from 32% to 51% but the company has been prevented from doing so by the Indian government and restrictions on FDI. Philip Morris International (PMI) PMI is a U.S. company with headquarters in Lausanne, Switzerland. PMI is ranked second in the global tobacco market behind China National Tobacco Company. PMI currently owns a 25% stake in Godfrey Phillips India after selling part of its shares to KK Modi in 2009. In 2009, after years of trying to get approval to independently manufacture Marlboro cigarettes in India, PMI allowed production of its most popular brand to start under the supervision of Godfrey Phillips. Japan Tobacco International (JTI) The country of Japan is the majority shareholder in JTI and the company is headquartered in Geneva, Switzerland. JTI is ranked fourth in the global tobacco market. JTI currently holds a 50% stake in JTI India, a joint venture with a Mumbai-based law firm, the Thakkar family. JTI has been working since 2008 to increase its stake in its Indian unit from 50% to 74% 25 | P a g e

but was prevented from doing so by the Foreign Investment Promotion board. In early 2010, JTI invested $65 million USD in its India unit just days before the Indian government decision to ban FDI in cigarette manufacturing. JTI is affiliated with ITC through the manufacturing of Berkley cigarettes, which makes up 1.3% of the Indian cigarette market. Although JTI is the global brand owner of Berkley, the brand is manufactured in India by ITC. Leading Cigarette Brands Promoted in India Cigarette companies aggressively advertise their brands in order to attract new smokers and to encourage current smokers to switch brands. From March 2009 to March 2010, cigarette leader ITC spent 5.1 billion Rs ($114.7 million USD) on advertising and promotion. According to Euromonitor International, cigarette companies are focusing on targeting young urban consumers and middle-upper income consumers. Companies are also shifting brands away from unfiltered variants to filtered variants. In 2009, local brand Gold Flake had the largest cigarette market share in India (31%), followed by Wills (18%) and Scissors (8%) - all of which are owned by ITC Group. Table 2.7 Market Share of Top Ten India Cigarette Brands Retail Volume (%) Brand
Gold Flake Wills Scissors Four Square Capstan Bristol Charminar Red & White Charms Cavenders

Company name
ITC Group ITC Group ITC Group Godfrey Phillips India Ltd ITC Group ITC Group VST Industries Ltd Godfrey Phillips India Ltd VST Industries Ltd Godfrey Phillips India Ltd

2010
31.2 18.2 8.4 7.9 7.4 6.9 4 3 3 2.5

(Source 2010 Euromonitor International) 26 | P a g e

Table 2.8 Ownership of Major Local Brands Company ITC Group Major Brands Gold Flake (1), Wills (2), Scissors (3), Capstan (5), Bristol (6), Classic, Silk Cut, Navy Cut, India Kings, Insignia, Flake Godfrey Philips India Four Square (4), Red & White (8), Cavenders (10), Tipper, Stellar, I-gen, Jaisalmer, North Pole VST Industries Golden Tobacco Charminar (7), Charms (9), Panama, Chancellor, Golden, Taj Chap, Style Mini Kings, Steel, June, Just Black, Lips, Diet Blue Numbers refer to the brands market position by retail volume in 2010 (Source 2010 Euromonitor International) While global cigarette brands are sold in India, the government severely restricts in country production of these brands. Besides Marlboro, other international brands sold in India include BATs Benson & Hedges and JTIs Winston brands. Slim cigarettes targeting women Although the female smoking population is currently very small (about 3%), cigarette companies in India see the potential for growth by attracting women. Since 2007, slim cigarette brands have been launched to appeal to women smokers. The first slim cigarette to hit the Indian market was the Stellar Slims brand by Godfrey Phillips in 2007. The brand is marketed as having lower levels of nicotine with the satisfaction of a regular cigarette. In 2008, ITC Group launched Wills Classic Verve slim cigarettes targeted at women and first time smokers. ITC describes the brand packaged in a shiny red as Indias trend setting cigarette[that] defines ubercool urban style.

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Golden Tobacco also has a slim cigarette called June.

Targeting health conscious consumers with misleading claims As Indian customers become more aware of the health risks associated with tobacco use, cigarette companies have created new products and tactics to counteract consumer knowledge. One such tactic is to use misleading terms (ex low-tar) on cigarette packaging or in advertisements that encourage health- concerned smokers to switch to cigarettes brands that they perceive as safer. This also offers consumers that are concerned about health risks from tobacco an alternative to quiting. As of 2006, India prohibits tobacco product packaging and labeling from containing information that is false, misleading or deceptive, or that is likely to create misperceptions about the characteristics or heath effects of tobacco products. This includes prohibiting the use of terms such as light, mild and low-tar. Despite these restrictions, cigarette brands are still misleadingly marketed as being healthier. Loe Tobac cigarettes launched by Golden Tobacco in 2006 claim to contain 50% less tobacco than regular cigarettes. Golden Tobacco also claimed that LoeTobac has been found to have safer delivery levels of tar, carbon monoxide and tobacco- specific nitrosamines than other brands. Golden Tobacco markets Diet Blue cigarettes which use ECOTINE technology and is low in TSNA [so that it] does less damage to smokers. On the company website, Diet Blues are also described as having almost zero carcinogens making them the safer option for existing habitual smokers. According to Euromonitor International, ITC plans to peruse creating less harmful cigarettes and is expected to promote mid and low tar cigarettes towards consumers in the future.

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Brands that appeal to young tech-savvy smokers. India has a very large technology industry and a growing information technology culture. Cigarette companies are capitalizing on the technology trend by introducing premium brands that appeal to younger consumers. Godfrey Phillips launched I-gen in 2006. I-gen cigarettes have a black filter and the black, red and silver packaging is aimed at making the product look trendy and contemporary. The brand is descried on the companys website as a cigarette that holds the promise cigarette quality and immense style. In 2005, Golden Tobacco launched Chancellor XP. XP refers to the Windows operating system and the brand is designed to appeal to Indias information technology workers.

Essential Facts The tobacco industry spends billions of dollars each year to market its products. The industry uses a mix of advertising, promotion and sponsorship tactics to directly affect tobacco use and attitudes related to tobacco. Tobacco advertising, promotion and sponsorship: Promote tobacco use as customary and glamorous. Are deceptive and misleading. Weaken public health campaigns. Target specific populations such as women, youth, and minority groups

Increase tobacco consumption by: Attracting new tobacco users. Increasing the amount of consumption among current smokers. Reducing a smokers willingness to quit. 29

Encouraging former smokers to start smoking again.

Through advertising of its products, the tobacco industry tries to create an environment in which tobacco use is familiar and socially acceptable, and the warnings about its health consequences are undermined. Comprehensive bans reduce Tobacco Use Comprehensive bans, which prohibit the use of all marketing strategies by the tobacco industry, reduce tobacco use among people of all income and educational levels. Partial advertising bans are less effective, in part, because the tobacco industry switches its marketing efforts to unrestricted outlets when bans are not comprehensive. A study of 22 developed countries found that comprehensive bans reduced tobacco consumption by 6.3%. A study of 102 countries showed that in countries with partial bans consumption only decreased by 1% compared with almost 9% in countries with comprehensive bans. A study of 30 developing countries found partial bans were associated with a 13.6% reduction in per capita consumption, compared to 23.5% in countries with comprehensive bans. The World health organization (WHO) Framework convention on Tobacco control (FCTC) requires comprehensive bans The FCTC, the worlds first global public health treaty, establishes a policy framework aimed to reduce the devastating health, economic, and social impacts of tobacco. The FCTC requires Parties to implement and enforce a comprehensive ban on tobacco advertising, promotion and sponsorship within five years of ratifying the FCTC. Tobacco advertising and promotion is defined in the FCTC as any form of commercial communication, recommendation or action with the aim, effect or likely effect of promoting a 30

tobacco product either directly or indirectly. Examples include: Broadcast, print and outdoor advertising. Point of sale advertising. Various sales and /or distribution arrangements with retailers for Product placement, sales promotions and discounts. Product packaging. Advertising on the Internet. Use of tobacco brand names, logos, or visual brand identities on non- tobacco products, activities, or events. Placement of tobacco products or tobacco use in the entertainment media.

Sponsorship is defined in the FCTC, as any form of contribution to any event, activity or individual with aim, effect or likely effect of promoting a tobacco product or tobacco use either directly or indirectly. Examples include: Sports Cultural events. Concerts. School programs. Corporate social responsibility activities such as youth prevention initiatives and charitable contributions to public and private organization.

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2.5 Tobacco Industry Promotion and Sponsorship The tobacco industry engages in a comprehensive marketing strategy to create the impression that tobacco use is widespread and acceptable. These strategies include direct advertising (ads on TV or in magazines and at point of sale) and indirect advertising such as sponsorship of sports and concerts, product placement, and brand stretching. In India, despite an advertising ban having passed in 2003, cigarette companies in particular consistently exploited loopholes in the law and relaxed enforcement to market their products and attract new users. Examples include: In 2010, Godfrey Phillips India broke into the Indian chewing industry with the launch of Pan Vilas, a premium pan masala brand, and planned to invest Rs 1 billion ($US 22 million) over three years on marketing the product. Nita Kapoor, vice president of marketing and corporate affairs said in reference to promoting Pan Vilas that the company would push this product aggressively to penetrate deeper in the market. Considering recent declines in cigarettes sales, the successful marketing of a pan masala brand will allow Godfrey Phillips easier access to the smokeless tobacco market. The company plans to launch a zarda product by the end of 2011. The ITC group uses two of its popular cigarette brands, Wills and John Player, as the brand name of lifestyle retailing stores that sell clothing. The Wills Lifestyle brand is a wellestablished brand and also sponsors Indias annual Fashion Week, stretching the cigarette brand name so that it is associated with the glamour of fashion and not just the deadly tobacco product. In 2009, 700 buses in Mumbai carried pan masala advertisements. While advertising nontobacco pan masala products is not illegal in India, their presence on buses is considered surrogate advertisement for tobacco products because the same brand name and packaging exists for both pan masala and chewing tobacco products. The advertising ban in India is not strictly enforced and tobacco companies take advantage by promoting their products in ways that are illegal. In 2009, Four Square, a popular Godfrey Phillips India brand, sponsored a concert series and talent contest in the city of

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Channai. The event titled Four Square- GET FAMOUS- be Tamil Nadus Next Singing Sensation was heavily promoted through limited edition cigarette packs, large billboards, point of sales displays and contest entry locations across the city. 2.6 Corporate Social Responsibility (CSR)

Tobacco companies maintain CSR programs in an effort to counter negative attention regarding their deadly business. This practice is particularly prevalent in India. By donating funds to noble causes, the perception of cigarette companies by the public and policy makers improves. The true goals of industry-sponsored programs have been revealed through internal tobacco industry memos released to the public by U.S. legal settlements. CSR programs:

Serve the industrys political interests by preventing effective tobacco control legislation. Marginalize public health advocates. Preserve the industrys access to youth. Create allies and preserve influence among policymaking and regulatory bodies. Defuse opposition from parents and educators. Bolster industry credibility.

In India, cigarette companies integrate themselves into local communities that they operate in through CSR activities. They also work nationally to create goodwill with the public and policy makers in an attempt to protect their profits.

Since 1990 Godfrey Phillips India has sponsored the Bravery Awards (first under the brand name Red and White and now under the company name). The Bravery Awards annually honors citizens that perform physical and social acts of bravery. Indian film actress Preity Zinta acted as an ambassador of the awards from 2006-08. The awards have also launched blood drives and the Amodini-Women's Empowerment initiative.

In 2000, the ITC launched e-Choupal, an IT training program for Indian framers. The program claims to reach over 4 million farming families, connecting them to a digital

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infrastructure that enables them to link to a more formal market. ITC also supports primary education, women empowerment and environmental initiatives. Smokeless tobacco companies are also known to use CSR tactics in the communities that they operate in. The DS Group, which includes Dharampal Satyapal, contributes to a wide range of social issues in Assam and Tripura. Activities include the renovation of Pallimangal H.S. School and contributions to economic development projects of ethnic and tribal groups in North Eastern States.

The tobacco industry in India is complex and powerful. Knowing where and how the industry operates is essential to creating and advocating for strong tobacco control policies. Unless strong tobacco control regulations are put in place and enforced in India, the tobacco industry will continue to expand and profit from addicting consumers to its deadly products.

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Chapter 3

35

3.1 Research methodology Objective of the Study The different objectives of our study of Indian tobacco industry are as given below. To study the tobacco industry in India To study the external environment factor affecting to Indian tobacco industry. To study current trend in Indian tobacco industry. To analyze the competitive scenario of the Indian tobacco industry To analyze the financial scenario and position of the Indian tobacco industry.

Research Design

Exploratory research design

Exploratory research design is used for finding variables & understanding the topic of research. Types of Data

Secondary data

Secondary data is collected for the purpose of getting idea about Indian tobacco industry. This entire project report is based on secondary data so we will collect the data from the secondary data sources. These sources are as given below. Web sites Books Magazines Journals etc. 36

We will not go for the primary data analysis so we do not require conducting a field work and we will also need not to meet people personally for collection of data. 3.2 PESTELC Analysis - Tobacco industry in India PEST analysis of any industry sector investigates the important factors that are affecting the industry and influencing the companies operating in that sector. PEST is an acronym for political, economic, social and technological analysis. Political factors include government policies relating to the industry, tax policies, laws and regulations, trade restrictions and tariffs etc. The economic factors relate to changes in the wider economy such as economic growth, interest rates, exchange rates and inflation rate, etc. Social factors often look at the cultural aspects and include health consciousness, population growth rate, age distribution, changes in tastes and buying patterns, etc. The technological factors relate to the application of new inventions and ideas such as R&D activity, automation, technology incentives and the rate of technological change.

PEST Analysis is a perfect tool for managers and policy makers; helping them in analyzing the forces that are driving their industry and how these factors will influence their businesses and the whole industry in general. Our product also presents a brief profile of the industry comprising of current market, competition in it and future prospects of that sector. Political Analysis The cigarette industry in India continues to operate in a challenging economic environment, particularly with respect to taxation and regulations relating to communication and consumption. The regulations, dictated by circumstances in more developed markets, together with prolonged punitive and discriminatory taxation have had the effect of being directed almost exclusively at cigarettes, thereby stifling cigarette consumption in India in comparison with other forms of tobacco consumption.

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High rates of taxes on cigarettes, in excess of 130% of the net value of the product, have rendered cigarettes unaffordable to the majority of tobacco consumers in the country. Apart from the adverse impact on the Exchequer, the reducing base of domestic cigarette consumption discourages investment in R&D and quality enhancement of tobacco varieties and thereby undermines the export potential of high value Indian cigarette tobaccos. It is estimated that contraband cigarette trade in India sets the country back by nearly Rs.2000 crores annually through loss of tax revenue and unaccounted outflow of foreign exchange. The Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003, (COTPA) is being implemented in a phased manner with effect from 1st May 2004. Economical Analysis India is a major grower and exporter of tobacco in the world. Presently India is among top three producers of tobacco in the world. Despite lower proportion of total produce being exported Indian exports it figures among top 10 exporters of the product in the world. Presently of the total tobacco produce in India, only 50% is used in the domestic market and of this domestic consumption of tobacco only 16% is used by cigarette industry. It is estimated that over 2.3 million persons depended on this sector for their livelihood. The annual wage bill in these enterprises averaged Rs 4 300 million, and annual wages per worker varied from Rs 8 400 in bidi factories to Rs 55 730 in cigarette, cigar and cheroot factories. The total net value added by all enterprises averaged Rs 15 000 million per annum, of which bidi factories contributed 41.2 percent, and cigarette and allied industries 34.3 percent. The total annual wage bill in the cigarette and allied industries, despite wages per worker being substantially higher, was only 4 percent of its gross value of output, compared to 16 percent in the bidi factories, because bidi manufacturing is more labour intensive. India is a major grower and exporter of tobacco in the world. Presently India is among top three producers of tobacco in the world. Despite lower proportion of total produce being exported Indian exports it figure among top 10 exporters of the product in the world. Presently of the total tobacco produce in India, only 50% is used in the

38

domestic market and of this domestic consumption of tobacco only 16% is used by cigarette industry. On the average, cigarettes account for about 85% of tobacco consumption globally, with an even higher share of almost 100% in large markets like China. In sharp contrast, cigarettes account for shares have declined from 21% two decades ago to about 14% currently. Social Analysis Moderation in rates of taxes, coupled with the aspiration of tobacco consumers to upgrade consumption, can multiply the share of cigarettes in India even in a shrinking basket of tobacco consumption. There is a growing public concern regarding increasing consumption of tobacco, its health implications and the need to prevent access to minors and non-users. With a view to achieving improvement of public health in general, the Government of India has banned the advertising of cigarettes in India. This includes all forms of advertising like TV commercials, print ads, pamphlets, hoardings etc. Also banned is the sale of cigarettes to any citizen below the age of 18. Again, all forms of transaction involving tobacco products should be carried on with a label displaying the harmful effects of its use. The label should be legible and prominent and conspicuous as to size and color. All such restrictions by the government have made the promotion of cigarettes almost impossible. It is mostly by word of mouth that the sales of cigarettes have risen. Technological Analysis On the technological front, ITC cigarettes have came a long way and that can be concluded by the fact that the supply chain management that the ITC employs now is of the latest trends- they have a great inventory control, logistics support etc. Environmental Analysis

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Natural EnvironmentThe main source of raw materials for cigarettes is raw tobacco which is mainly found in the state of Andhra Pradesh. There is no scarcity in supply of raw tobacco since the net income earned by the farmers from cultivating tobacco has been found to be much higher than the net income earned from other crops. Region EnvironmentThe gap between urban and rural households in cigarette consumption is the highest in low and lower-middle income households. Urban low and lower-middle income households consume more cigarettes compared to the similar income groups in rural areas.

(Source 2010 Euromonitor International) Tobacco Farming/Agriculture, Manufacturing Tobacco in India is sown on medium black and light soils. The crop takes 6 to 7 months to mature. It has a relatively short growing season, enabling farmers to cultivate other minor pulses such as green gram, black gram and certain varieties of rice outside the tobacco-growing season. Since tobacco is a short duration crop, the time lag between investment and returns is not long. It is also a hardy crop and grows on light soil with little risk from weather, pests and diseases making for fairly assured returns on investment. It is a labor-intensive crop in all three stages cultivation, harvesting and processing.

40

Price response and the assured market (contracts being typically entered into well before the harvesting of the crop) play a significant role in the economics of tobacco cultivation. The Tobacco Board serves as both a regulatory and a promotional body for Virginia tobacco. All farmers seeking to cultivate the crop need to register with the Board and are allocated quotas for Tobacco to be delivered to the auction platforms. The Board provides a minimum support price and arrangements for auction of the output produced. All buyers too need to be registered with the Board. Similar, though less rigorous support arrangements are operated by the Directorate of Tobacco Development in coordination with the state departments of agriculture for other types of tobacco.In addition to the above, the Central Tobacco Research Institute along with the Indian Council of Agricultural Research have been active in developing strains with better quality and higher yield, thus ensuring the sustainability and attractiveness of this crop to farmers. Legal Analysis The Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003, (COTPA) is being implemented in a phased manner with effect from 1st May 2004 along with the Ban on Smoking in Public Places with effect from last quarter of 2008 resulting in a dip in sales and profit. Potential Impact of Tobacco Tax Increases Effects on Tobacco Consumption and Government Revenues The effect of raising tobacco taxes on revenue and consumption in India. Annual consumption of manufactured cigarettes in India is estimated to have been 107.5 billion sticks and the tax revenue from cigarettes amounted to Rs 70.86 billion (US$ 1.56 billion based on an exchange rate of Rs 45.3 per US$ in year 2006) in the financial year 2006-07.13 Assuming that tax is collected on all cigarettes consumed (an assumption we examine below), this yields an average tax of Rs 659 per 1000 sticks (Rs 13.18 per pack of 20). We compute a weighted average retail price for cigarettes in India using data on prices of a set of most popular brands in different categories from Sunley,13 supplemented with data on the fraction that each of those brands represent in total cigarette consumption. For a representative cigarette, we calculate the excise duty as a percent of retail price to be 38.3% and the retail price to be Rs 1.72 per stick (Rs 34.4 per pack of 20).

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Taxes on bidis are very low, with a specific tax in the year 2007-08 of Rs 14 per 1000 sticks for handmade bidis and Rs 26 per 1000 for machine-made bidis.13 Since handmade bidis constitute more than 98% of bidis produced in India,13 Rs 14 is taken as the initial tax amount. Using the ad valorem tax rate (8.8%) for bidis and the tax per stick, we impute a price for an average bidi stick of Rs 0.16 (or Rs 4 per pack of 25 bidis). Annual consumption of manufactured bidis in India is estimated to have been between 750 billion to 1.2 trillion sticks in 2007. For the purpose of this simulation, we take the current consumption of bidis to be one trillion sticks. Tax revenue collected from bidis in the year 2006-07 was Rs 4.3 billion. Significantly, this figure is as much as 70% less than the potential revenue if taxes were collected on all bidis consumed. The initial tax revenue for our simulation is taken to be Rs 14 billion we assume taxes are indeed collected on all bidis consumed. There is, in reality, wide-scale tax evasion in the case of bidiswe assume otherwise here, for the purpose of simplicity. Tax shocks (increases in tax as a percentage of the existing tax) are introduced, and changes in consumption, expenditure and tax revenue are calculated using the price elasticities (rural and urban price elasticities of 0.338 and 0.196 respectively for cigarettes, and rural and urban price elasticities of 0.922 and 0.855 respectively for bidis). The effects are calculated separately for rural and urban India using the corresponding elasticities and are later aggregated to obtain the allIndia results. Of the total cigarettes consumed, 43% are attributed to rural, and 57% to urban households as estimated from the National Sample Survey (NSS) data. For bidis, the proportions are 82% and 18% for rural and urban households, respectively. Bidi taxes currently average 9% of retail price; revenues will continue to increase till bidi taxes reach 40% of retail price, which would be equivalent to a 600% increase from the current level of roughly 9% of the retail price. Specifically, the tax on bidis can be increased to Rs 98 per 1000 sticks as compared to the current Rs 14, with revenue increasing as the tax increases. At that level, the average price of a pack of 25 bidis would be slightly more than Rs 6, or Rs 0.24 per stick, which would effectively mean a 53 percent increase from the current average retail price of just under Rs 4 for 25 sticks, or Rs 0.16 per stick. An intuitive explanation for the predicted patterns is that smokers cut back on consumption, though by a smaller proportion than the tax-induced price

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increase. Smokers spending increases to a point, with increasing fractions of that spending being diverted to tax revenues. Revenue from higher taxes on cigarettes in the model increases until the total tax is about 78% of the retail price, which effectively means that the tax can be increased to almost Rs 73.8 per pack of 20 compared to the current Rs 13.18 per pack. Consumer expenditures and tax revenues on cigarettes start declining only after the tax reaches at least Rs 3691 per 1000 sticks. Effectively, this translates to a 176% increase from the current average retail price of cigarettes. While the figures of a 600% increase in current taxes of bidis and 460% increase in tax of cigarettes might seem drastic, the actual taxes in our projections only rise to 40% and 78% of retail price of bidis and cigarettes respectively. Indeed, the Rupee value of the revenue-maximizing and consumption-minimizing taxes are not especially high increasing the near zero tax per bidi stick to a tenth of a rupee can halve consumption and increase revenues four-fold. The following assumptions are used to arrive at these results: (1) no substitution effects due to price change, (2) change in price is commensurate with change in tax, (3) elasticity is constant across the entire range of prices, and (4) there is no tax evasion or smuggling as a result of increased taxes. These assumptions are fairly strong. Allowing for tax evasion, or allowing for changes in consumption of bidis when cigarette taxes increase might reduce the revenue projected. Price changes can instead have the opposite effect of further reducing consumption if bidi and cigarette producers pass on to consumers price increases more than proportionate to tax increases. The analysis provides strong support for taxing all tobacco products regardless of form (bidis, cigarettes or leaf tobacco). However, the existing tax on bidis of Rs 14 per 1000 sticks is negligible compared to the Rs 819 per 1000 tax on the lowest-taxed filtered cigarette. The recent study by Jhaetal. suggests that increased taxes on bidis can be justified on health grounds as even modest levels of smoking substantially increase the risk of death. there is a potential to increase taxes on cigarettes. An important first step in this context was the move to bring unfiltered cigarettes up to the tax treatment of filtered cigarettes in the 2008-09 central government budgets, as part of the broader move towards a simpler tax administration

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Competitor Analysis With a market share of a whopping 72%, ITC cigarettes do not have to worry much about the competition at the present moment. Its nearest competitor Godfrey Philips has a market share of 12% which is not really a competition at present. 3.3 SWOT Analysis: Strength India is one the largest manufacturers of tobacco in terms of production. Tobacco is traditional item of India's foreign trade. India is one of the leading Tobacco exporting countries in the world. India amounts for 5.8% of the international trade and ranks 5 thafter Brazil, U.S.A. Turkey and Zimbabwe. Weakness The growth of various varieties of Tobacco is at the mercy of unscrupulous traders and middlemen. The burden of Tobacco tax has increasingly shifted to cigarette with the removal of duty on raw Tobacco since 1979, resulting in discriminatory rates of duty compared to other Tobacco products. Prohibition of Direct advertising. Opportunities Central Tobacco Research Institute at Rajamundry has been entrusted with the r e s e a r c h f o r development of alternative uses of Tobacco in view of anti smoking campaign. India's share in world cigarette production has remained at around 1.7% where as India's exports of around 2.8 billion sticks of cigarette per year amounts for less than 1%of the world export of cigarette. There is significant opportunity for cigarette industry to extent and consolidate its position in intentional market due to some recent trend like withdrawal/reduction of agricultural subsidy and escalating cost in the traditional cigarette exporting countries.

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Threats Various N.G.Os and Forums against the use and consumption of tobacco. The passing of various bans on smoking.

3.4Porters Five Force Model

1).Threat of new entrance

New product differentiation very tough already cigarettes are different price point, flavours, brand images.

Access to distribution channel is tough- big & established players are present (e. g. ITC) Capital requirement is very large for a pan India launching.

2).Bargaining power of suppliers = low Many inputs are required but in small amount paper, tobacco, filter There are many small scale, unorganized suppliers Cigarette companies are big and have direct access to distribution channel and addicted buyers. Suppliers dont have much control over smokers.

3).Bargaining power of buyers = low

Addicted customers - even after knowing harms-people cant leave it Smoking has clot of symbolic and emotional value attached with it Product quality not much important to smokers research show most people cant different among the brands in a blint taste.

Switching cost in terms of price

4).Rivalry amongst existing firms = high 45

Many completing firms: ITC, Godfrey Phillips, VST, GTC etc Growth of industry Advertisement for cigarettes is now prohibited in India. Replacement for ads event sponsorships and sales promotions. All making new product launching Product standardisation Exit barriers

5).Threat of substitute = low

Herbal Cigarettes (e.g. Nirdpsh) were launch but did not become a popular. Nicotine patch is another substitute but again no comparison with cigarettes in terms of popularity and usage.

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Chapter -4

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4.1 Ratio Analysis 4.1.1. Net Profit Ratio

Table 4.1 Net Profit Ratio

Year Net Profit Ratio (%)

2007 16.18

2008 10.76

2009 9.86

2010 12.01

2011 14.47

Figure 4.1 Net Profit Ratio

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Net profit margin ratio establishes a relationship between net profit and sales and indicates management efficiency in manufacturing administering and selling the products. This ratio is over all measured of the firms liability to turn each profit margin may decline due to fall in sales price or increase in the cost of production. In 2007 net profit ratio is 16.18%. And that is decline for next two year. Because of ban on advertisement. That was effect on sales of the tobacco products. Than it was increase.

4.1.2. Current ratio:

Table 4.2 Current ratio:

Year 2007 Current ratio 3.31 (%)

Figure 4.2 Current ratio

2008 3.08

2009 2.78

2010 1.76

2011 2.76

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Current assets to current liability that define the current ratio as per the date analysis this ratio is fluctuate. Highest in 2007 about 3.31 which is good may be due to financial policy & government & taxes.

4.1.3. Fixed Asset Turn Over Ratio:

Table 4.3 Fixed Asset Turnover Ratio:

Year
Fixed Asset Turn Over Ratio (%)

2007 1.05

2008 3.94

2009 3.11

2010 8.71

2011 5.48

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Figure 4.3 Fixed Asset Turn Over Ratio:

This ratio is concern with how frequently the fixed assets are use to the total sales of the tobacco product. As the highest ratio the industry is in growing due to efficient use of asses to produce the product & sales.

4.1.4. Inventory Turnover Ratio

Table 4.4 Inventory Turnover Ratio

Year

2007

2008

2009

2010

2011

51

Inventory Turnover ratio (%)

2.1

9.47

7.31

10.27

7.55

Figure 4.4 Inventory Turnover Ratio

Inventory includes raw material means tobacco, semi finish good & finish package material which is term as inventory. Now it is compare with total sales of the year. As per data ratio is good in 2008 @ 9.47 which is reduce in 2009 @ 7.31 and further increasing after year @ 10.46. That also reduces in 2011 @ 7.55.

4.1.5. Earnings before Interest, Taxes and Depreciation

Table 4.5 Earnings before Interest, Taxes and Depreciation

Year

2007

2008 52

2009

2010

2011

Earnings before Interest, Taxes and Depreciation (%)

18.82

13.64

6.95

5.95

12.46

Figure 4.5 Earnings before Interest, Taxes and Depreciation

This ratio is concern with revenue generated without considerate long taxes, interest and depreciation. Ratio duty says it is steadily decreasing from 2007 to 2010. And then it was increasing in 2011 @ 12.46. In period of 2007-2010 it was decreasing due to decline in sales of tobacco product.

4.1.6. Earnings before intrest and taxes

Table 4.6 Earnings before Interest and Depreciation

Year

2007

2008

2009

2010

2011

53

Earnings before intrest and taxes (%)

17.53

12.49

5.37

5.83

10.5

Figure 4.6 Earnings before Interest and Depreciation

This ratio is concern with revenue generated without considerate long taxes, interest and depreciation. Ratio duty says it is steadily decreasing from 2007 to 2009. And then it was increasing in 2010 @ 5.83 and in 2011 @ 10.5. In period of 2007-2009 it was decreasing due to decline in sales of tobacco product. That was effect of bane on advertising of tobacco products.

4.1.7. Return on net worth

Table 4.7 return on net worth

Year

2007

2008

2009 54

2010

2011

Return on net worth (%)

3.73

4.24

1.02

5.16

11.99

Figure 4.7 return on net worth

This ratio is most importance for the entire stockholder. This ratio is fluctuating in rates. So Higher the ratio higher the dividend, internal efficiency term, loyalty of customer Quality product etc In 2007-2009 it was fluctuating due to fluctuating in sales. Than it was increase because that after sales of tobacco product also increase.

4.1.8. Interest Coverage Ratio

Table 4.8 Interest Coverage Ratio

Year Interest coverage

2007 29.94

2008 23.05

2009 4.14

2010 8.36

2011 29.79

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ratio (%)
Figure 4.8 Interest Coverage Ratio

The graph shows that the interest coverage ratio of the Indian tobacco Industry is decreasing readily from 2007 to 2009. This shows that the inefficiency of the industry to utilize the debt fund is increasing in every year, and its increase from 4.14% to 8.36% from the 2009 to 2010. In 2011 it was increase to 29.79%. So we can say that efficiency of the industry to utilize the debt fund is increasing in 2010 & 2011.

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Chapter 5

5.1 Recommendations

57

Immediate and sustained measures need to be taken to reduce tobacco use in India. Higher taxes will reduce tobacco consumption and counter its health consequences, while at the same time generating significant new revenues, a portion of which can be used to support other efforts as part of a comprehensive approach to reducing tobacco use. Based on the evidence presented in this report, we make the following recommendations for tobacco taxation in India: Increase bidi taxes substantially

India should, over a few years, increase the bidi tax from Rs 14 to Rs 98 per 1,000 bidis. This will increase government revenue by Rs 36.9 billion (US$ 0.8 billion), raise the tax to 40% of the retail price, and increase the average price of bidis by 53%. The price increase will avert up to 15.5 million premature deaths that would otherwise be caused by bidi smoking. Tighten policies regulating bidi production

To effectively address bidi taxation policy, a number of suggestions have been made. (i) The small producer exemption should be eliminated or limited to truly small companies (not those effectively under the direct ownership or control of larger companies). (ii) The sale of unbranded bidis should be prohibited, and manufacturer names should be printed on bidi packets to ensure higher tax compliance. (iii) Reporting of the sale and purchase of processed bidi tobacco by any persons or entity should be made mandatory. Other safeguards include recording the exact volume of transactions, and the names of persons involved in all transactions involving the purchase and sale of bidi tobacco.

Increase cigarette taxes substantially

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A significant increase in the existing tax on cigarettes will reduce cigarette smoking and the resultant public health damage, while at the same time generating higher cigarette tax revenues. Raising the cigarette tax to Rs 3691 per 1000 sticks (a 460% increase in the tax) will increase the tax to 78% of the retail price (a 176% price increase). A tax increase of this magnitude will avert 3.4 million premature deaths that would otherwise be caused by cigarette smoking, while at the same time raise about Rs 146.3 billion (US$ 3.1 billion) in new revenues per year. Bidis and cigarettes do not appear to be substitute products suggesting that the price increase on one could be done without fear of substitution to the other. These observations are based on the assumption that there is no increase in individual tax avoidance or larger-scale organized smuggling in response to the higher taxes. For India, there is some evidence of a non-trivial and growing market for smuggled cigarettes. However, rather than forgoing significant tax increases, we recommend locally implementation of effective efforts to curb illicit tobacco trade including strengthening systems of licensing, customer verification, security and preventive measures along supply and distribution chains. Simplify, extend and strengthen tobacco taxation

The practice of taxing cigarettes based on length should be abolished to simplify tax administration and convey the public health message that all cigarettes regardless of their shape, design or length are harmful to the health of their users. The overall approach, which would help maximize public health gains and revenue collection (and decrease tax evasion), would be to simplify the system by reducing and eventually eliminating the differential taxes on various smoked tobacco products to eventually end up at a high specific tax that is regularly adjusted for inflation. In practical terms, effective tobacco taxation includes inflation-adjusted central government excise taxes on bidis, cigarettes and other tobacco products, and supplementary excises in the proposed Goods and Services Tax regime, in addition to innovations to tax other tobacco products more effectively. In a changing tax landscape, detailed and well-planned tax administration studies that sustain the evidence base for higher taxation of tobacco products will be especially important. Produced, under-taxed tobacco products the proper use of evidence-based tax policy has the potential to have an even greater positive impact on short- and medium-term revenue, the growth of effective tobacco control programmers, and reduced tobacco use.

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Explore earmarking as a means of supporting additional tobacco control efforts

Experience from other parts of the world, including Thailand and Australia, suggests that earmarking by raising taxes and dedicating some of the new revenues to comprehensive tobacco control and other social and public health programmers is politically viable. Although increasing tobacco tax is the single most effective tobacco control intervention, when tobacco taxes are increased as part of a comprehensive approach to reducing tobacco use, the reductions in use and improvements in health are greater than from a tax increase alone. If the tax increases recommended above are adopted and effective tax compliance and ant smuggling measures are in place, the tax increases would generate more than 18,400 crore rupees (184 billion rupees, or US$ 3.8 billion) per year. These extra funds could pay for a substantial proportion of the National Rural Health Mission, National Urban Health Mission and other social programmers. Interventions can have an important impact on the looming crisis of tobacco-related morbidity and Mortality in India, while helping to further establish the countrys leadership role in the development of effective policy-based solutions to the global tobacco epidemic

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Chapter 6

6.1Conclusion

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The study has discussed about the Indian tobacco industry with strategic and financial views. The tobacco industry is one of the most profitable industries in the world. Tobacco companies use their enormous wealth and influence both locally and globally to market their deadly products. India is the worlds second largest producer of tobacco. Endowed with rich agro-climatic attributes such as fertile soils, rainfall and ample sunshine, India produces various types of to ba cc o . The immediate and tangible benefits that accrue from tobacco cultivation, manufacture and marketing act as incentives for farmers to grow tobacco and for the government to encourage tobacco cultivation and manufacture. The tobacco industry in India, has sections on each of the tobacco sectors as well as examples of tobacco promotion, sponsorship and corporate social responsibility efforts designed to increase consumption and industry profits.

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Chapter 7

7.1 Bibliography

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Websites www.capitaline.com/ http://www.indiantobacco.com/

http://www.itcportal.com/about-itc/newsroom/press-reports/PressReport.aspx? id=284&type=C&news=increase-impact-cigarette-volume. http://www.panparag.com/productsgallery.html . http://www.godfreyphillips.com/pdfs/Financial-Report-31-03-2010.pdf. http://www.goldentobacco.in/Profile.htm. http://www.who.int/entity/tobacco/mpower/mpower_report_full_2008.pdf.

7.2 Annexure 1 (Balance sheet of Indian tobacco industry)

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Year SOURCES OF FUNDS : Share Capital Reserves Total Equity Share Warrants Equity Application Money Total Shareholders Funds Secured Loans Unsecured Loans Total Debt Total Liabilities APPLICATION OF FUNDS : Gross Block Less : Accumulated Depreciation Less:Impairment of Assets Net Block Lease Adjustment Capital Work in Progress Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Miscellaneous Expenses not written off Deferred Tax Assets Deferred Tax Liability Net Deferred Tax Total Assets

2011 71.57 27.91 0 0 99.48 0.82 0 0.82 100.3

2010 106.29 1,061. 30 0 0 1,160. 24 264.92 21.1 286.02 1,446. 26 304.23 140.21 0.03 163.53 0 19.34 686.52

2009 106.29 948.73 0 0 1,048. 13 236.46 105.53 341.99 1,390. 12 250.91 128.95 0.03 121.46 0 57.76 680.31

2008 39.92 443.66 0 0 483.58 206.93 452.69 659.62 1,143. 20 208.02 109.15 0 98.87 0 54.6 461.24

2007 37.7 396.57 0 0 434.27 195.58 438.5 634.08 1,068. 35 201.03 100.78 0 100.25 0 6.71 254.36

32.83 15.74 0.02 17.07 0 0 5.43

18.23 24.91 21.87 50.89 115.9

230.46 74.7 171.05 312.8 789.01

194.05 65.61 144.91 307.75 712.32

137.28 27.05 186.21 355.7 706.24

126.4 30.56 294.83 427.31 879.1

14.74 22.26 37 78.9 0.03 0.14 1.27 -1.13 100.3

166.29 39.74 206.03 582.98 1.67 2.19 3.08 -0.89 1,453. 61

158.87 17.41 176.28 536.04 1.68 2.08 2.79 -0.71 1,397. 01

154.54 25.17 179.71 526.53 1.57 2.31 1.92 0.39 1,143. 20

152.95 21.25 174.2 704.9 1.78 2.04 1.69 0.35 1,068. 35

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7.3 Annexure 2 (P & L of Indian tobacco industry)

Year INCOME : Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income EXPENDITURE : Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Administration Expenses Miscellaneous Expenses Less: Pre-operative Expenses Capitalised Total Expenditure Operating Profit Interest Gross Profit Depreciation Profit Before Tax Tax Fringe Benefit tax Deferred Tax Reported Net Profit Extraordinary Items Adjusted Net Profit Adjst. below Net Profit P & L Balance brought forward Statutory Appropriations Appropriations P & L Balance carried down Dividend Preference Dividend 2011 2010 2009 2008 2007 879.62 323.62 556 177.8 4.37 738.17 372.82 10.43 36.52 71.9 93.01 11 0 595.68 142.49 17.74 124.75 11.79 112.96 11.25 1.34 8.17 92.2 2.04 90.16 0 250.59 0 19.19 323.6 8.72 0

184.3 1,278.97 1,016.77 854.7 6 7 43.77 255.24 264.91 269.15 140.5 1,023.73 751.86 585.62 9 5.17 35.1 28.65 53.66 -2.99 -1 10.17 5.99 142.77 1,057.83 790.68 645.27 42.58 1.89 4.09 48.45 12.11 1.4 0 110.52 32.25 0.26 31.99 1.1 30.89 10.41 0 0.01 20.47 0.54 19.93 0 8.41 0 6.66 22.22 0 3.98 461.72 12.54 63.75 130.56 152.62 32.46 0 853.65 204.18 35.75 168.43 14.23 154.2 22.24 -0.01 0.17 131.8 8.77 123.03 0 420.7 0 37.84 514.66 17.21 3.98 367.02 305.59 9.95 9.23 49.81 44.72 92.85 63.06 118.96 106.38 21.5 16.03 0 0 660.09 130.59 41.11 89.48 10.6 78.88 5.64 3.16 -0.1 70.18 -3.97 74.15 0 367.29 0 16.77 420.7 8.61 0 545.0 1 100.26 24.42 75.84 10.9 64.94 2.55 2.8 -0.03 59.62 -3.85 63.47 0 323.6 0 15.93 367.29 8.61 0

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