Cigarette Sales Go Up In Smoke After Increase In Excise Duty

The Rs 7,500-crore cigarette industry may end up with a growth of about one per cent in volume terms in 1997-98 (over the production of 103 billion sticks in 1996-97). In 1996-97, the industry had registered a growth of nearly 7-8 per cent in volumes.

In the 1997-98 Union budget, the major increase in the excise duty was on filter cigarettes with a length of less than 70 mm and on the non-filter cigarettes with length exceeding 60 mm but not 70 mm. The duty was raised from Rs 430 to Rs 500 and from Rs 315 to Rs 350 per thousand cigarettes respectively.

 

Duties on different sizes of cigarettes have had a distinct impact on sales. The fall in sales of cigarettes in the first half of 1997-98 was mainly due to the revision in specific rates of excise duty. On a weighted average basis, the increase in excise works out to 15.3 per cent, more than double the inflation rate.

In the first half of 1997-98, sales income of three cigarettes companies -- GTC Industries, ITC and Godfrey Phillips India-- rose by 14 per cent to Rs 3,933 crore (Rs 3,443 crore). Their operating profit was up 70 per cent to Rs 570 crore (Rs 335 crore).

A major restructuring programme undertaken by the GTC Industries helped it register an operating profit of Rs 6.5 crore (-Rs 67.2 crore). Gross profit rose to Rs 513 crore (Rs 256 crore), up 101 per cent. Net profit surged 191 per cent to Rs 313 crore (Rs 108 crore).

Operating profit margin of the three companies improved to 14.5 per cent (9.7 per cent), gross profit margin to 13.1 per cent (7.4 per cent) and net profit margin to 7.9 per cent (3.1 per cent).

Cigarettes contribute nearly 84 per cent to the total income of ITC. The company is engaged in the business of cigarettes and tobacco products, hotels, packaging & printing, speciality paper and export. It reported the highest profit margin among the three companies.

The cigarette industry is dominated by four major players -- ITC, VST Industries, Godfrey Phillips India and GTC Industries. The market share calculated on the basis of 1996-97 figures shows that ITC has dominated the scene with a share of 67.5 per cent followed by VST Industries (13.3 per cent), Godfrey Phillips India (12.8 per cent) and GTC Industries (6.4 per cent).

ITC and Godfrey Philips are expanding their licensed capacities to meet the rising demand. ITC has increased the capacity of its Kidderpore factory in Calcutta.

The market share of non-filter cigarettes not exceeding 60 mm is about 19 per cent and that of those above 60 mm and below 70 mm 23.4 per cent. However, the market share of filter cigarettes not exceeding 70 mm is about 44 per cent, that of above 70 mm but less than 75 mm 8.2 per cent and of cigarettes above 75 mm but less than 85 mm, 5.4 per cent.

Non-filter cigarettes in the range of above 60 mm and below 70 mm and filter cigarettes not exceeding 70 mm account for more than 67 per cent of the total cigarette market.

Though these two segments drive the industry growth, they are under pressure owing to the major increase in the excise duty.

According to industry sources, in the past few years since 1994, the micro segment (non-filter cigarettes below the length of 60 mm) has been the volume driver in the industry. But the excise hike of 50 per cent over the last two years in this segment has reversed the trend.

Cigarettes are a price elastic product and any rise in tags will have an adverse impact on demand and volumes. Sources say cigarette consumption has been on the decline, particularly in the price sensitive segment.

Tobacco is a major raw material for the industry. Its consumption in India is in the form of bidis, cigarettes and a few other tobacco products. Bidis account for 54 per cent, while the cigarette industry consumes 19 per cent of the total tobacco consumption.

Cigarette tobacco constitutes just a third of the total crop in India. Yet the segment contributes 90 per cent of government revenues.Of the 200 million adult tobacco users in India, 50 per cent smoke bidis, 37.5 per cent chew tobacco and the rest smoke cigarettes.

Since the excise rate on cigarettes is the highest in India, domestic demand may decline in the near future.

The only alternative for cigarette companies is to tap the export market as India's cigarette export is negligible. This is despite the fact that the realisation from export of cigarettes is four times that from tobacco.

In 1996-97, India exported 130 million kg of tobacco amounting to Rs 825 crore -- an increase of 54.9 per cent and 95.9 per cent in quantity and value terms respectively.

Since the cigarette consumption is increasing in south-east Asia and the CIS countries, India can take advantage of the same. This will be possible only if the cigarette manufacturers use high quality tobacco and adopt the latest manufacturing technology.