How Russia’s Anti-Tobacco Laws Will Impact Philip Morris

The Russian Government has finally begun a resolute attempt to curb the tobacco epidemic in the country, and this may have a huge impact on international cigarette makers, such as Philip Morris (NYSE:PM), Imperial Tobacco (LON:IMT), British American Tobacco (NYSEAMEX:BTI) and Japan Tobacco (TYO:2914).

See our full analysis for Philip Morris International

After China, Russia is the largest cigarette market in the world by volume. Around 38% of its population smoke cigarettes and each smoker consumes an average of over 17 cigarettes a day, according to a recent study by The Lancet. ^[1]

A draft bill was recently issued, seeking to reduce smoking in the country through bans on cigarette advertising, public smoking and retail sales at kiosks. Although the bill will reach the parliament only in spring 2013, due to a number of delays, ^[2] we believe that even if some of the proposals are enforced, there would be a drastic decline in the number of smokers in the country. Furthermore, the Russian health ministry recently unveiled a series of graphic images, which will be printed on all cigarette packs sold in the country from May next year.

Another concern is the increase in excise duty on cigarettes to around 40% by 2015. ^[3] This usually does not have much effect on revenues and margins as tax increases are passed on to consumers through price increases. However, this would cause consumers to look for alternatives, such as papirosy (cardboard tube-tipped cigarettes), hand-rolled cigarettes and smokeless tobacco products.

This does not bode well for the tobacco companies considering that Russia is one of their largest markets. The cigarette market size in Russia was estimated at around 375 billion units in 2011. This constitutes around 23% of the total cigarette market size of the Eastern Europe, Middle East & Africa (EEMA) region. Philip Morris has a share of around 26% of total cigarette sales in the country.

The Russian cigarette market has remained relatively flat in recent years, and the recent developments may initiate a gradual decline in the market size. We currently project the EEMA market volume to decline at a rate of around 0.5% until the end of our forecast period. If the upcoming laws in Russia cause the cigarette market volume to decline at a rate of 3% over the course of our forecast period (similar to the declining rate in Europe, Australia and North America), it would lead to an overall decline of around 1.2% per year, all else constant. This would cause a 1.3% downside to our price estimate for Philip Morris, assuming no change in our market share forecasts.

Further, strict tobacco laws in Russia might prompt governments of neighboring countries such as Ukraine and Belarus, which also have very high smoking rates, to take action. Overall, apart from markets such as the European Union, Canada and Australia, cigarette makers may face a sharp decline in cigarette consumption in the EEMA region as well, led by countries like Russia.

We currently have a price estimate of $89 for Philip Morris, which is in-line with the market price.

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1. Tobacco use in 3 billion individuals from 16 countries, The Lancet, August 2012 [↩]
2. Timeline for Russia’s Anti-Smoking Bill is Delayed, WSJ, September 2012 [↩]
3. Philip Morris, BAT, Japan Tobacco battle Putin’s Anti-Smoke Plan, Bloomberg Businessweek, May 2012 [↩]