Although cigarette sales are up, manufacturers' profitability will likely see marginal declines due to increased tobacco and packaging pricing.
Rating agency Crisil expects India’s domestic cigarette volume growth to increase 5-6% higher than pre-pandemic levels this fiscal year, even with illicit cigarettes taking away a large volume.
This year's volume is expected to surpass 93 billion sticks due to increased outdoor mobility brought on by the easing of pandemic restrictions and a stable tax system. In FY18, cigarette volume was 85 billion sticks; in FY19, it reached 91 billion sticks. This number decreased slightly in FY20 due to the pandemic to 90 billion sticks, then plummeted to 77 billion sticks in FY21. The volume increased once more to 88 billion sticks in FY22.
Anand Kulkarni, a director at Crisil, said that the fourth quarter of the previous fiscal saw cigarette sales volume run rate surpass pre-pandemic levels due to the third wave's relatively modest impact. Demand is encouraged by rising office occupancy, nearly normal retail and leisure mobility, and a steady tax environment during the previous two years.
However, with increased tobacco and packaging costs, profitability for manufacturers is likely going to see a marginal decline. Prices for flue-cured virginia tobacco, which is mostly farmed in Andhra Pradesh, Telangana, and Karnataka, have increased by 15% year-on-year due to late rainfall that affected farming in the key harvesting months of December 2021 and January 2022. Paper prices are also projected to increase by 10% this year. Additionally, after the ban on single-use plastic, cigarette packaging will need to switch to biodegradable materials, which would raise costs to some extent.
Despite the increased costs, profitability will still be strong and the companies are likely to maintain operating margins of about 65% due to the significant competitive advantage of established manufacturers and high entry barriers including established distribution channels and advertising restrictions.