According to a report by rating agency Crisil, cited by the Financial Express, India's cigarette sales this year are expected to reach 93 billion due to a stable tax system and improved liquidity as pandemic restrictions ease.
The COVID-19 lockdown led to a sharp drop in cigarette sales, with the total number of cigarettes sold falling from 90 billion in 2020 to 77 billion in 2021. As restrictions eased, sales rebounded to 88 billion.
The increase in quantity will assist cigarette manufacturers in coping with the continuously rising input costs. According to Crisil, the manufacturer's gross profit margin is expected to decrease by 100-150 basis points.
Indian cigarette manufacturers use Virginia (FCV) tobacco, which is mainly grown in the states of Andhra Pradesh, Telangana, and Karnataka. Due to the impact of rainfall in December 2021 and January 2022, the price of FCV has increased by 15% since last year's harvest.
Meanwhile, starting in 2020, it is estimated that cigarette paper prices will increase by 10% in this fiscal year. With cigarette manufacturers turning towards biodegradable materials, India's recent ban on single-use plastics has also pushed up production costs.
From 2013 to 2017, the tobacco consumption tax saw a yearly growth of 15.7%. In the 2018 fiscal year, due to an increase in consumption tax and a transition to goods and services tax, the industry's tax revenue increased by 20%.
Despite these challenges, the financial condition of cigarette manufacturers seems to be quite good.
Crisil Deputy Director Gopikishan Dongra stated that due to the strong competitive advantage of established manufacturers, as well as high barriers to entry such as entrenched distribution channels and advertising restrictions, tobacco companies may maintain a profit margin of around 65%.
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