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Wednesday, April 26, 2017

Sensex hits 30K, but no acchhe din for sin stocks under Modi government

BY 
KIRAN KABTTA SOMVANSHI
, ET BUREAU | APR 26, 2017, 09.05 PM IST


ET Intelligence Group: The wages of sin – at least in the stock markets – are often handsome. India appears to have become a pronounced exception to this global investment axiom since the Narendra Modi government took office three summers ago: Tobacco and liquor stocks languished in this period amid shriller opposition to 'sin' products across vast swathes of the country. 


The latest Supreme Court order banning the sale of liquor near highways capped the initiatives by various states to curb alcohol consumption. Similarly, punitive taxation and tough regulatory measures hurt cigarette companies, which have struggled to sell more in one of the world’s youngest countries 

The effect of subdued sales volumes is visible: India’s top-three tobacco and liquor stocks have underperformed since 2014, compared with the returns these shares generated under UPA-I and UPA-II. The stocks of United Spirits and United Breweries have fared worse than those of cigarette makers, and generated negative returns in the three years of the current government, compared with high double-digit compounded annual growth rates (CAGR) under UPA-I and II.

By contrast, tobacco stocks have at least not lost money, although the returns measured in CAGR have trailed those under previous regimes. Market leader ITC, which sells four out of five cigarettes manufactured in India, has been the worst performer. The threat of more regulatory curbs on smoking continues to weigh on the sector after the Modi government implemented the plan to print larger health warnings on cigarette packs and enhanced the excise duty. Although ITC has hit a new high this year, the three-year CAGR returns have been subdued at 6%, compared with double-digit returns the stock had generated for investors under the two UPA governments. 


To be sure, the statistical base effect has taken its toll not only on the sin industry, but also on the broader markets: The Sensex and the Nifty – the two broadest gauges on the competing stock exchanges in Mumbai – have registered low single-digit CAGR since 2014. By contrast, both indices recorded double-digit CAGR in the UPA-1 and UPA-2 regimes. In the three years since the inauguration of the Modi government, the Sensex has returned 5.9% CAGR, and the Nifty 7.4%. 

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