Cigarette volume to grow by 5-6% in current fiscal: CRISIL

NEW DELHI: Better mobility and a stable tax regime could help increase cigarette volumes by 5-6% this fiscal, helping them grow past pre-pandemic levels, ratings firm Crisil said. Said in a note on the sector.

Analysts at Crisil said that on expected sales of 93 billion sticks, the volume of the organized cigarette industry would be up 3% over FY20.

He, however, cautioned that rising input prices will cut manufacturers’ gross margins by 100-150 basis points.

“However, the credit profile will remain healthy due to higher volumes, healthy operating margins and a strong balance sheet,” said the report, an analysis of cigarette manufacturers rated by Crisil Ratings, which accounts for over 90% of the organized sector volume. ” ,

Meanwhile, Crisil Ratings director Anand Kulkarni said cigarette volumes exceeded pre-pandemic levels in the fourth quarter of last fiscal. “Rising occupancy at workplaces, near-normal retail and entertainment dynamics, and a stagnant tax regime over the past two years bodes well for demand,” Kulkarni said.

In FY21, these mobility indicators remained below pre-pandemic levels, as reflected in a 14% drop in cigarette sales volumes. But in the last fiscal, volumes grew by 14%, as the indicators improved to near normal levels, the report said.

However, cigarette makers are likely to see a marginal decline in profits this fiscal due to tobacco and packaging prices. These two account for 50-60% of the total cost of the manufacturers. The prices of both are skyrocketing.

“Cigarette manufacturers largely use flu-curable Virginia (FCV) tobacco, the prices of which have been volatile. FCV prices have increased by 15% year-on-year as farming was affected by unseasonal rains in December 2021 and January 20222, which is the normal harvesting period. Paper prices are projected to be 10% higher this fiscal on an already elevated basis from the previous fiscal,” the report said.

In addition, after the ban on single-use plastics, the outer packaging of cigarettes will need to be shifted to biodegradable materials, which will also increase the cost to some extent.

These factors are set to affect the gross margins of domestic cigarette manufacturers.

Gopikishan Dongra, Associate Director, CRISIL Ratings, said, however, due to strong competitive advantage of established manufacturers and strong distribution channels and high entry barriers like restrictions on advertising, profitability will remain healthy this fiscal with EBIT margin at 65%.

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