When Philip Morris International (NYSE:PM) first became an independent publicly traded company, one of the reasons investors were excited about the global tobacco giant was that by separating from its former parent, it would avoid the regulatory scrutiny that U.S. tobacco companies have labored under for decades. As it happened, though, Philip Morris has had to deal with plenty of regulatory issues of its own. The complex web of different enforcement and regulatory frameworks across countries poses a constant challenge to the company. Recent action from the Indian government is just one example of the threat that changing attitudes toward tobacco could have on future financial performance.
What's happening with Philip Morris in India?
The latest issue for Philip Morris arose just last week. An investigative report revealed internal Philip Morris documents discussing the way in which it markets Marlboro cigarettes. Of particular note were advertisements in tobacco shops and the distribution of complimentary cigarettes at bars and nightclubs within India. By doing so, according to India's Ministry of Health and Family Welfare, Philip Morris is allegedly violating national law and various rules propagated under that law, specifically targeting the younger consumers who visit those establishments most frequently.
In response, the health ministry will be in contact with Philip Morris to address the issues, following procedures under the law to maintain appropriate controls over the tobacco industry. If the ministry finds that Philip Morris has improperly advertised Marlboro, then it intends to take action to prevent regulatory violations in the future and impose appropriate disciplinary action.
Why India matters
India is a huge market for the tobacco industry. As the world's second most populous nation, about 100 million Indian residents smoke. Yet Philip Morris has only minimal exposure in India, in large part because of foreign direct investment laws that impose restrictions on overseas companies seeking to do business there.
That creates a huge opportunity for Philip Morris in India with its reduced-risk products. One of the key challenges that the iQOS heated tobacco system has faced in markets like Japan and various nations in Europe is that Philip Morris already has an extensive traditional cigarette business there, and so it runs the risk of cannibalizing its own business when it encourages smokers generally to give up regular smoking in favor of iQOS. Promoting iQOS in a high-population area where Philip Morris doesn't already have extensive penetration offers the potential for pure gains in customer counts and revenue. Combine that with the long-term expectations for the size of the Indian market, and it's definitely worth Philip Morris International's time to figure out a strategy for India.
What's next for Philip Morris in India?
Philip Morris so far hasn't emphasized India in its strategic plans for iQOS. The nation wasn't one of the 20 markets that Philip Morris chose in its initial rollout of iQOS, which mostly focused on Europe and Japan. Now that the company is bolstering production of its heated tobacco for use in iQOS devices, Philip Morris expects to accelerate its rollouts, going national in areas in which it has only thus far launched city-specific initiatives. Investors can presumably expect more city-level introductions in the near future as well.
There's danger for Philip Morris even beyond India. Regulators in different countries look at the actions that they collectively take, and they often try to unify efforts or piggyback on enforcement actions initiated elsewhere. If Philip Morris has used sales tactics like the ones it's allegedly used in India, then it could face more negative action in different markets, or the possibility of new legislation to make those and similar practices illegal in places where they're currently permitted.
Philip Morris likely won't see a huge direct hit to its bottom line even if the worst happens in India. Yet its future growth prospects on the subcontinent are extensive, and jeopardizing them could put even more pressure on financial results that have already left many investors feeling disappointed.