Cigarette sales set to rise 5-6 pc to surpass pre-Covid level this fiscal: Report

Between FY13 and FY17, excise duty on cigarettes rose annually at 15.7 per cent.

Cigarette sales set to rise 5-6 pc to surpass pre-Covid level this fiscal: Report
In fiscal 2018, the industry saw a further 20 per cent hike in taxes as a result of the increase in excise duty and transition to the GST regime. (IE)

Domestic cigarette manufacturers are on course to record higher volume growth than the pre-pandemic levels at 5-6 per cent this fiscal, despite smuggled in cigarettes chipping away a good volume, a report said on Wednesday.

Rating agency Crisil said it expects the volume to go past 93 billion sticks this year on the back of increased outdoor mobility after ebbing of the pandemic restrictions and a stable tax regime.

Cigarette volume has been on the upward spiral since FY18 when it was 85 billion sticks, which rose to 91 billion sticks in FY19. The sales volume declined marginally to 90 billion sticks in FY20 before plunging to 77 billion sticks next year due to the pandemic. In FY22, the volume went up again to hit 88 billion sticks.

The volume is projected to touch 93 billion sticks this year, according to the report.

It said though gross margins will moderate on rising input cost, credit profiles of manufacturers will stay robust owing to higher volumes, healthy operating margins and strong balance sheets.

Rising demand on the back of the near end of pandemic curbs and the stable prices will light up cigarette sales by 5-6 per cent on year during this fiscal year, helping the industry surpass pre-pandemic levels. Volume is expected to touch 93 billion sticks, the agency said, adding, for the organised cigarette industry, volume will be 3 per cent higher than in FY20.

The report sees the rising input cost shaving off gross margins by 100-150 basis points for manufacturers. Prices of tobacco and packaging paper, which together account for 50-60 per cent of total cost, have been rising and will rise further this fiscal.

According to Anand Kulkarni, a director with the agency, cigarette sales volume run rate has exceeded pre-pandemic levels in the fourth quarter of last fiscal as the impact of the third wave turned out to be modest. Increasing occupancy at workplaces, near-normal retail and recreation mobility and a stable tax regime over the past two years augur well for demand.

Cigarette sales volume saw a 14 per cent decline in fiscal 2021 due to the mobility curb. But in FY22, the volume bounced back with a surge of 14 per cent as mobility returned to near-normal levels.

Between FY13 and FY17, excise duty on cigarettes rose annually at 15.7 per cent. In fiscal 2018, the industry saw a further 20 per cent hike in taxes as a result of the increase in excise duty and transition to the GST regime.

Another growth enabler is the continuing stable taxation, which also has sizeable bearing on demand. Since fiscal 2013, such levies, including excise duty and Goods and Services Tax (GST), have increased significantly, leading to progressive migration from duty-paid cigarettes to other lightly taxed/tax-evaded tobacco products such as illegal cigarettes and bidis.

However, profitability is likely to decline marginally as prices of tobacco and packaging are rising.

Cigarette makers largely use Flue-Cured Virginia (FCV) tobacco (grown mostly in Andhra, Telangana and Karnataka), prices of which have been volatile. FCV prices have risen 15 per cent on-year as cultivation was impacted by untimely rainfall in December 2021 and January 2022, which are the main harvesting months.

Also, prices of paper are estimated to be 10 per cent higher this fiscal on an already elevated base of last fiscal. Further, after the ban on single-use plastic, the outer packaging of cigarettes will need to shift to biodegradable materials, which will also increase cost to some extent. These are expected to impact gross margins, the report pointed out.

According to Gopikishan Dongra, an associate director at the agency, profitability will yet remain healthy and the companies are likely to retain around 65 per cent operating margins, due to the strong competitive advantage of established manufacturers and high entry barriers such as entrenched distribution channels and restrictions on advertising.

Credit profiles have been resilient given healthy cash generation. They also have strong balance sheets with negligible debt and robust liquidity of Rs 30,000 crore as of March 2022.

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