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NEW DELHI: Improved mobility and a stable tax regime could help lift cigarette volumes by 5-6% this fiscal helping them move beyond pre-pandemic levels, ratings firm Crisil said in a note on the sector.
At an expected sales of 93 billion sticks, the organised cigarette industry volume will be 3% higher than in fiscal 2020, analysts at Crisil said.
However, they warned that rising input prices will shave off 100-150 basis points from the gross margin of manufacturers.
“Credit profiles, however, will remain healthy owing to higher volumes, healthy operating margins, and strong balance sheets, an analysis of cigarette manufacturers rated by Crisil Ratings, which account for over 90% of organised sector volume, shows," the report added.
Meanwhile, Anand Kulkarni, Director, Crisil Ratings, said that cigarette volume run rate exceeded pre-pandemic levels in the fourth quarter of last fiscal. “Increasing occupancy at workplaces, near-normal retail and recreation mobility, and a stable tax regime over the past two years augur well for demand," Kulkarni said.
In fiscal 2021, these mobility indicators remained below pre-pandemic levels as reflected in a 14% decline in cigarette sales volume. But last fiscal, volume surged 14% as the indicators improved to near-normal levels, the report added.
However, the profitability of cigarette makers is likely to marginally decline this fiscal because of the prices of tobacco and packaging. These two account for 50-60% of total costs for manufacturers. Prices of both have been inching up.
“Cigarette makers largely use flue-cured Virginia (FCV) tobacco, prices of which have been volatile. FCV prices have surged 15% year-on-year as cultivation was impacted by untimely rainfall in December 2021 and January 20222, which is the typical harvesting period. Prices of paper are estimated to be 10% higher this fiscal on an already elevated base of last fiscal," the report said.
Further, post the ban on single-use plastic, the outer packaging of cigarettes will need to shift to biodegradable materials, which will also increase the cost to some extent.
These factors are set to impact the gross margins of domestic cigarette makers.
However, profitability will remain healthy this fiscal with an EBIT margin at 65% due to the strong competitive advantage of established manufacturers and high entry barriers such as entrenched distribution channels and restrictions on advertising, said Gopikishan Dongra, Associate Director, Crisil Ratings.