Higher workplace occupancy could boost cigarette sales, says CRISIL

Cigarette sales volumes are anticipated to experience a notable uptick of 7-9 per cent in the current fiscal year, propelled by the resurgence in workplace occupancy rates and a steady tax framework. The industry had witnessed a remarkable 18 per cent rebound in volume sales during the previous fiscal year, bouncing back from the adverse effects of the Covid-19 pandemic which had plagued the 2020 and 2021 fiscal years.

The forthcoming growth in cigarette sales is projected to align more closely with the long-term average of approximately 5 per cent.

Manufacturers in the tobacco industry are poised to maintain their profitability owing to their strategic focus on premium cigarette offerings and selective price adjustments in specific categories, even in the face of mounting input cost pressures. The companies' robust financial positions are expected to reinforce their credit profiles.

According to a comprehensive analysis conducted by CRISIL Ratings, covering cigarette manufacturers that collectively represent over 90 per cent of the organised segment's sales volume, these trends hold true.

Anand Kulkarni, director at CRISIL Ratings, emphasised the pivotal role of physical workplace occupancy in driving cigarette sales when he said, "The resurgence of employees returning to the office has been steadily gaining momentum, with projected average workplace occupancy rates expected to reach 65-70 per cent this fiscal year, compared to roughly 40 per cent in the previous fiscal. Furthermore, the stability in government taxes, which significantly impact demand, is poised to support this growth. It has also contributed to the stability of retail prices in recent years."

In the current fiscal year, the organised segment of the cigarette industry is expected to achieve sales volumes not seen in a decade, supported by tax stability. Between fiscal years 2013 and 2018, substantial increases in levies, including excise duty and GST, led to a decline in the share of organised cigarette sales.

Although the Union budget for 2023-24 raised the national calamity contingent duty on cigarettes by 16 per cent, the actual impact on the industry is minimal, estimated at 1-2 per cent. Market players have absorbed this impact through modest price increases of 3-5 per cent for mid-premium and premium categories.

Organised players within the industry are diversifying their product portfolios by introducing variants of existing brands and launching entirely new brands aimed at the mid-premium and premium segments. They are also driving innovation by introducing new flavours, smaller packaging options, and additives designed to reduce the harshness and odour associated with cigarette smoke.

While cigarette demand remains resilient, the supply side has experienced cost pressures. Tobacco prices, constituting 50-55 per cent of manufacturing costs, have registered a compound annual growth rate of 20-25 per cent over the past three fiscal years, and this trend is expected to persist in the current fiscal year. Cigarette manufacturers primarily rely on flue-cured Virginia tobacco, the prices of which reached record levels in recent auctions due to a global shortage and heightened demand.

On the impact of rising input costs, CRISIL Ratings associate director Rucha Narkar said, "The increase in input costs may marginally impact profitability by 50-100 basis points in this fiscal year, with an anticipated EBIT margin of approximately 65 per cent. Moderate price adjustments and a continued focus on premiumisation will help protect the margins of industry players. Moreover, well-established manufacturers benefit from a strong competitive advantage thanks to high barriers to entry."

Overall, the credit profiles of CRISIL-rated cigarette manufacturers are expected to remain robust, supported by minimal debt levels and strong liquidity, estimated at around Rs 22,000 crore as of 31 March, 2023, the agency said.

The cigarette industry's outlook for the fiscal year remains optimistic, buoyed by increased workplace occupancy and a stable tax environment, as manufacturers navigate the challenges posed by rising input costs with innovative product offerings and strategic pricing adjustments.