Mutual Funds sell tobacco stocks

Whether or not smokers take warnings against tobacco use seriously, mutual funds have been slowly kicking the habit - by halving their exposure to stocks of cigarette and chewing tobacco firms this year.

While tobacco usage continues to grow despite various campaigns being carried out across the world, a slew of measures in India such as increased excise duty and value added tax is likely to hit the coffers of such firms, analysts believe.

Fearing further negative impact on the earnings of these companies in the long term when anti-tobacco campaigns start taking their toll on the consumption, the fund houses have been paring their exposure to these stocks in the past few months.

An analysis of the portfolios of various equity mutual funds shows that amount invested in the shares of tobacco and pan masala companies comprised just one per cent of their net assets at the end of June, as against more than two per cent at the beginning of this year.

The listed tobacco firms in India include ITC, Dalmia Group's GTC Industries, Godfrey Phillips India, VST Industries and Kothari Products.

While ITC has been an all-time favorite of equity funds and still finds place in the top-ten portfolios of a number of MF schemes, almost all of them seem to be losing their charm.

The equity funds held shares worth about Rs 960 crore in these companies at the end of last month, down from about Rs 1,088 crore in May, which accounted for 1.1 per cent of their net assets, data compiled by brokerage house Sharekhan shows.

At the end of December 2006, the funds held Rs 1,835- crore stock of tobacco processors, which accounted for 2.01 per cent of their net assets.

ITC's products include popular cigarette brands like Navy Cut, Classic and Gold Flake while GTC (formerly Golden Tobacco Company) has brands like Panama, Chancellor and Esquire. VST Industries sells Charminar and Charms brands under the product category.

Earlier in April, the funds held stocks worth Rs 1,055 crore or 1.16 per cent of net assets in the tobacco processing firms, down from Rs 1,387 crore or 1.44 per cent of net assets a month ago.

At the end of January, the funds held stocks worth Rs 1,620 crore or 1.7 per cent of net assets.

The analysts also argue that significant gains registered by these stocks in the recent past, despite hike in excise duty in this year's union budget and additional value-added tax in states like Delhi, have also led to the funds booking profits in these stocks.

Stocks like Godfrey Phillips, Kothari Products and GTC have outperformed the overall market since the beginning of 2007 with Kothari Products and GTC rising more than the benchmark Sensex in the last one year.

While the Sensex has gained nearly 40 per cent in past one year, share price of Kothari Products has nearly doubled and that of GTC gained by more than 50 per cent. Kothari Products' share price reached an all-time high last week.

Although, ITC and VST Industries have lost value in past one year, they moved higher since the beginning of 2007.

The analysts believe companies themselves have expanded into a number of new sectors and this could be a possible hedging exercise against any drop in tobacco revenues.

While ITC has forayed into spaces like apparel, retail, FMCG and hospitality, GTC has diversified into petrochemicals, paper, marine, hospitality and communications businesses.

Among the major funds, UTI Mutual Fund's Variable Investment Scheme has slashed its exposure to ITC in the past few months. It held about 39,000 shares worth about Rs 60 lakh in the company at the end of last month, down from 64,000 shares of about Rs 94 lakh in February.

However, UTI MF's another scheme, UTI Wealth Builder, has increased its exposure to ITC and currently holds about 11.7 lakh shares worth about Rs 17.8 crore, up from about eight lakh shares of Rs 14.8 crore in November 2006.