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    For investors, tobacco is a bigger sin than alcohol? Or, so say their stocks

    Synopsis

    Ever since 2016, valuations of major global tobacco stocks have seen consistent de-rating.

    shutterstock_221007928Shutterstock.com
    More than half of alcohol stocks have outperformed their local indices over the same period.
    NEW DELHI: Valuations of major tobacco stocks globally have seen consistent derating over the past 3-5 years, and their returns have lagged equity benchmarks. But another set of sin stocks, those belonging to liquor business, have seen an improvement, shows a study by Edelweiss Securities.

    Shrinking valuations of tobacco stocks have driven underperformance of tobacco stocks vis-a-vis local indices in various markets, says the report. Comparisons of stock returns offered by Philip Morris against that Dow Jones, BAT and Imperial Tobacco against FTSE100, Japan Tobacco against Nikkei, and ITC against Nifty, suggest tobacco stocks have been at a receiving end globally.

    But more than half of alcohol stocks have outperformed their local indices over the same period.

    “In India, while smallcap cigarette stocks such as VST Industries and Godfrey Phillips have delivered significant outperformance, market leader ITC, like its global peers, has been a clear underperformer (flat in 5 years, PE down to 18 times from 24 times)" Edelweiss said.

    Valuation derating

    The divergence has been seen despite tobacco companies delivering in-line or higher earnings growth than local indices and boasting top-quartile ESG disclosure scores. In some cases, tobacco companies have even outgrown alcohol companies in terms of earnings.

    “Stronger investor aversion to tobacco vis-à-vis liquor stocks is attributable to it being a relatively bigger health hazard and environmentally more damaging, not to mention other social concerns. Indian tobacco major ITC suffered a similar valuation de-rating,” Edelweiss said.

    Since 2016, valuations of major global tobacco stocks have seen consistent de-rating across the board. On the contrary, most global alcohol stocks have got re-rated.

    “Furthermore, the valuation compression has occurred despite tobacco companies faring highly in terms of ESG disclosures, which improved their ESG metrics over the years. Noticeably, the period starting 2014 has also seen global ESG investments tripling to $ 31 trillion, where exclusionary or negative screening strategy dominates. Even among non-ESG funds, investor mindset for tobacco stocks seems to be wary: yes, there is growth and high cash generation, but an uncertain future ahead and hence there is a ceiling to the price one is willing to pay,” Edelweiss said.

    Return

    The biggest trait going against tobacco is its highly addictive nature, the brokerage said.

    Data shows less than 20 per cent of smokers manage to quit successfully. And there is no prescribed safe level of exposure. Studies also peg tobacco-related death rates to be up to three times higher than other such products.



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    (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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