BAT and Imperial Tobacco Slide on Proposed Russian Tax Boost

Cigarette Pack

British American Tobacco and Imperial Tobacco Group dropped the most in around a month in London trading after a declaration that health regulators in Russia, the second-largest tobacco market, suggested increasing cigarette taxes almost eightfold.

BAT, the producer of Dunhill cigarettes, decreased as much as 1.8% to 3,249 pence, the steepest intraday decrease since September 12. Davidoff producer Imperial Tobacco dropped as much as 2.3% to 2,316 pence, the most since September 7.

The Russian Health Ministry suggested the tax raise from the end of 2012, Finmarket |noted on October 8, citing a ministry data. The measure would increase the tax to 4,000 rubles ($128) per 1,000 cigarettes by the end of 2015 from 510 rubles this year, according as outlined by Finmarket, a part of the Moscow-based Interfax news service. According to present policy, excise taxes are planned to boost around 40 % a year between now and the end of 2014.

“If the suggestion were approved and became a law, it could decelerate income growth from Russia,” Erik Bloomquist, an analyst at Berenberg Bank, said. The measure could decrease Russian cigarette volumes by approximately 20 % in 2015, he said, in contrast to his existing calculated yearly drop of 1 percent to 2 percent.

Russia is as well due to offer a regulation banning smoking in public places to Parliament by November 1, defying resistance from leading tobacco companies like Japan Tobacco, Philip Morris International and British American Tobacco. The Russian authorities want to minimize premature deaths resulting from smoking, Deputy Health Minister Sergei Velmiaikin said September 3.

BAT had 20.8 % of Eastern Europe’s tobacco market in 2011. Russia makes up about about 8% of BAT’s earnings and 7% of operating profit, Barclays analysts estimate. Russia is the largest cigarette market after China.

Imperial Tobacco has around 9.4 % of Russia’s tobacco market, the cigarette maker said in May.

Nomura analyst David Hayes downgraded his view on the tobacco sector to bearish from neutral, citing the risk of underperformance after 3 years of outperformance. He cut his recommendation on Imperial Tobacco to lessen from neutral, while sustaining a buy recommendation on BAT shares.

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