Indian cigarette giant ITC bets on tobacco even as it touts ESG push

India’s largest tobacco firm is banking on progress of its cigarette enterprise even because it promotes its environmental, social and governance requirements to draw traders scared away from the business.

ITC has sought to diversify past cigarettes, increasing into every part from fast-moving client items and expertise to accommodations. However cigarettes account for a 3rd of revenues and 80 per cent of earnings earlier than tax and curiosity on the 112-year-old firm and ITC expects the market to develop, as client swap to cigarettes from alternate options comparable to chewable tobacco.

Sanjiv Puri, ITC’s chair, advised the Monetary Occasions in an interview that the corporate would develop its core enterprise whereas selling “accountable capitalism” and ESG-compliant practices.

“We’ll proceed to take a position and reinforce market standing” in cigarettes, Puri mentioned, alongside its different companies.

However Vaishakhi Mallik, an affiliate director at Very important Methods, a public well being marketing campaign group, rejected the argument that cigarette firms may very well be thought of sustainable.

Tobacco kills greater than 1m folks a 12 months in India, she mentioned, and regardless of “making an attempt to persuade the general public, traders and governments that they’re altering for the higher . . . that is nonetheless an business that harms well being and the surroundings”.

ITC’s largest shareholder is British American Tobacco, with an virtually 30 per cent stake, and the Indian firm reported revenues of Rs158.6bn ($2bn) and revenue after tax of Rs41.6bn within the quarter that resulted in December.

ITC’s diversification plan displays the methods deployed by international tobacco teams to keep away from being blacklisted by traders whilst they continue to be depending on the excessive profitability of cigarettes. It additionally underscores the paradox that cigarette firms can take pleasure in excessive ESG rankings for making provide chains extra environmentally pleasant regardless of the well being harm brought on by their core merchandise.

Marlboro-maker Philip Morris Worldwide says its long-term ambition is to wind down its cigarette enterprise. Swedish Match, a Stockholm-listed firm specialising within the smokeless tobacco product snus, introduced in September that it deliberate to spin off its cigar enterprise and develop into “smoke-free”.

ITC faces distinctive challenges. A ban on e-cigarettes in India means it’s unable to diversify into decreased threat sectors comparable to vaping, as its worldwide friends have performed.

“ITC is in a really tough place due to the surroundings by which they function,” mentioned Erik Bloomquist, a worldwide tobacco business guide.

However the firm scores a double A ranking on MSCI’s ESG index, which is comparatively excessive amongst massive Indian firms. Puri mentioned the corporate was carbon-positive, which means it absorbed extra CO2 than it emitted, and argued there was an rising consensus amongst traders that firms must be judged on how they have been “reworking” somewhat than excluded from portfolios. “It’s an evolution that’s occurring,” he mentioned.

India has the world’s second-highest variety of tobacco customers at about 270mn adults, in keeping with the World Well being Group’s World Grownup Tobacco Survey. However ITC says fewer than 10 per cent smoke over-the-counter cigarettes, with the remainder consuming smuggled cigarettes, chewable tobacco or beedis, tobacco hand-rolled in a leaf.

Puri additionally advised traders in December that ITC deliberate “to maximise the potential of the cigarette business inside the tobacco basket” however its non-tobacco companies would develop quicker. He didn’t rule out splitting the companies, saying it “may very well be an alternate mannequin in future, and we’re fairly open and versatile to it”.

However traders haven’t but been satisfied tobacco firms can type a part of an ESG portfolio.

ITC’s inventory has rallied 15 per cent since late February as traders judged it to be low cost. However overseas institutional holdings of the inventory have practically halved to about 10 per cent since 2017, in keeping with brokerage Motilal Oswal. “There isn’t any materials discount in its dependence” on cigarettes, the brokerage mentioned.