Office workforce return to sparks 7-9% surge in cigarette demand: Report

A recent report suggests that the resurgence of office-based workforces, combined with a stable tax environment, is poised to drive an estimated 7-9% increase in cigarette demand for the current fiscal year.

The report, authored by Crisil Ratings, revealed that cigarette sales experienced a notable 18% rebound in the previous fiscal year following a dip in demand due to the pandemic's impact in the preceding two financial years.

Looking ahead, the report anticipates that volume growth will approach the long-term average of 5%. The rating agency also noted that despite input cost pressures in FY24, cigarette manufacturers are expected to maintain robust profitability by focusing on premium cigarette offerings and implementing price hikes in select product categories.

The report, based on an analysis of cigarette manufacturers responsible for over 90% of the organized segment's sales volume, underscores the significance of healthy balance sheets in supporting credit profiles.

Anand Kulkarni, a Director at Crisil Ratings, highlighted the role of physical office occupancy in driving cigarette sales, with expectations of a rise from 40% in the previous fiscal year to 65-70% in the current fiscal year. Kulkarni also emphasized the importance of a stable tax regime in bolstering demand.

The report acknowledged that increased levies, including excise duty and goods and services tax, had previously dampened organized cigarette sales between FY13 and FY18. However, the recent 16% increase in the national calamity contingent duty on cigarettes in the FY24 Union Budget is expected to have only a marginal impact of 1-2% on the industry. Manufacturers have managed this impact by implementing limited price hikes of 3-5% in mid-premium and premium categories.

Cigarette manufacturers have faced cost pressures due to rising tobacco prices, which constitute 50-55% of manufacturing costs. These costs have seen a compound annual growth of 20-25% over the past three fiscal years and are projected to continue increasing in FY24.

Rucha Narkar, an associate director at Crisil, noted that while rising input costs may slightly affect profitability by 50-100 basis points this fiscal year, operating margins are anticipated to remain around 65%. Moderate price increases and a focus on premiumization will help safeguard these margins. Overall, credit profiles are expected to remain resilient, supported by minimal debt and robust liquidity of approximately ₹22,000 crore as of March 2023.