Cigarette Volumes Likely to Fall Despite Strong Margins, says Crisil

Domestic cigarette volumes are expected to decline by 6–8 per cent in the next fiscal year following the imposition of additional excise duties and a higher GST rate, Crisil Ratings said in a report on Tuesday.

Under the revised tax structure, the compensation cess will be removed, and an additional excise duty of Rs 2.05 to Rs 8.5 per cigarette stick will be levied, depending on cigarette length. In addition, the GST on the final price of cigarettes will rise to 40 per cent, effective February 1.

Crisil Ratings noted that the impact of the tax changes will vary across segments. Mid to premium cigarettes, typically longer than 65 mm, will attract excise duties ranging between Rs 3.6 and Rs 8.5 per stick. Meanwhile, the mass segment, comprising cigarettes shorter than 65 mm, will face a lower duty of Rs 2.05 to Rs 2.1 per stick.

The mass segment currently accounts for 40–45 per cent of industry volumes, but manufacturers are expected to absorb part of the tax increase in this category, given the high price sensitivity of consumers.

Explaining the likely pricing strategy, Shounak Chakravarty, Director at Crisil Ratings, said manufacturers would adopt a differentiated approach across segments.

“While the mid to premium segment will see higher duty hikes, amounting to around 25 per cent of the current maximum retail price (MRP), manufacturers are expected to pass on most of the impact to end consumers, as buyers in this segment display greater loyalty to specialised offerings such as low-nicotine variants and flavoured cigarettes,” Chakravarty said.

“In contrast, duty hikes in the price-sensitive mass segment will be lower at around 15 per cent of the current MRP, and manufacturers are likely to partially absorb the increase to limit volume de-growth. Even so, overall industry volumes could decline by 6–8 per cent next fiscal, in line with trends seen during previous duty hikes,” he added.

Despite the anticipated decline in volumes, the financial position of cigarette manufacturers is expected to remain resilient, Crisil Ratings said. Earnings before interest and tax (EBIT) margins are projected to moderate by 200–300 basis points, but are still expected to remain strong at over 58 per cent in the next fiscal year.

The credit profiles of major players are likely to be supported by robust liquidity, negligible debt, and healthy cash flows, the agency said. The organised cigarette industry—which accounts for around 10 per cent of total tobacco consumption in India—currently holds a cash surplus exceeding Rs 20,000 crore, providing a significant buffer against near-term pressures.

(With inputs from ANI)