A draft law has been proposed in Russia which would ban public smoking in the country, prohibit the advertisement of cigarette brands, introduce graphic images on cigarette packing and set minimum retail price for all tobacco products. 
Russia is the second biggest cigarette market in the world and Russians consumed 375 billion cigarettes in 2011. The total cigarette market has been declining at a rate of 2% for the last couple of years on an annual basis but these moves could be a major blow for tobacco majors if they are able to accelerate the slowdown process. 
Bulgaria’s Parliament has already passed a law (effective from June 1, 2012) which prohibits smoking in all closed public spaces. From now on, Bulgarians will not be able to smoke at at all indoor public places (including restaurants, cinemas, movie theaters etc) and work places. Smoking will only be allowed at specialized isolated places which should be equipped with air-ventilation system and tightly closed doors.  We investigate what potential effects these moves can have on Philip Morris International.
- Philip Morris Earnings: Foreign Currency Impact Smokes Out Earnings
- Philip Morris Earnings Preview: Cigarette Volume Decline Moderates, Foreign Currency Headwinds Persist
- E-Cigarette Market In The U.K. Part 2: Big Tobacco Enters The Fray
- E-Cigarette Market In The U.K. Part 1: A Health Threat Or A Cure?
- Philip Morris In Emerging Markets: Will Costs Outweigh Benefits?
- Philip Morris In Emerging Markets: Is A Slowdown Here To Stay?
We have a $94 price estimate for Philip Morris International, which is about 10% higher than the market price.
How it Affects Philip Morris International ?
Philip Morris International classifies Russia and East European countries in the EEMA region (East Europe, Middle East and Africa). The total cigarette consumption was a little more than 1600 billion cigarettes in 2011 and is pegged to decline by 0.5% annually to reach 1570 billion cigarettes annually by the end of Trefis forecast period.
However, if the proposed bill in Russia is passed and the Bulgarian smoking ban has a considerable effect on the consumption, we could see a reduction in the market size. Even if the market size were to decline at an average annual rate of 4% for the next few years, consumption would be around 1200 billion cigarettes annually. Note that you can drag the trend line to arrive at your own, customized price estimate.
However, as we have seen in the U.S. and West Europe, tobacco companies raise prices periodically to compensate for the falling volumes. Currently, we estimate the company to maintain its margins for the EEMA region.
So if the adjusted EBITDA margins were to rise to 46% by the end of forecast period, we arrive at a $90.40 price or 3% lower than the current estimate. This is assuming there is no significant redistribution of market share after the bill is passed. Thus, we feel Philip Morris International is pretty well positioned to bear the effects of harsh regulatory environment without suffering considerable damage.
On the brighter side, not all is lost for tobacco companies. Not all of the countries plan to extend the public smoking ban. Romania, for example, is hoping to capitalize on Bulgaria’s smoking ban to attract a greater number of smoking addicted tourists.  Romanians consume about 30 billion cigarettes annually whereas Bulgarians about 20 billion. Notes:
- Russia considers public smoking ban, May 22, 2012 [↩]
- Philip Morris 2011 10-k [↩]
- Smoking ban at indoor public and work places comes into force in Bulgaria on 1 June, focus-fen.net, June 1, 2012 [↩]
- Romania Gloats about Beating Bulgaria with No Smoking Ban, etmoc.com, May 31, 2012 [↩]
- Cigarette Consumption, tobaccoatlas.org [↩]