Duty hikes to dent cigarette volumes by 6-8% next fiscal, says Crisil

Crisil expects India's cigarette volumes to fall 6-8% next fiscal as higher excise duty and GST from February squeeze demand, especially in the mass segment

The domestic cigarette industry is expected to see a 6-8 per cent volume contraction next fiscal following the imposition of additional excise duties and an increase in goods and services tax (GST) rates from February 1, Crisil Ratings said on Wednesday.

 

Currently, cigarettes are charged 28 per cent GST along with a varied compensation cess. From February 1, the compensation cess component will be removed and an additional excise duty (ranging from Rs 2.05 to Rs 8.5 per stick) will be levied, based on the length of the cigarettes. 

Crisil said that it will have differing impacts on mid to premium cigarettes. Mid to premium cigarettes (more than 65 mm) will be levied excise duty of Rs 3.6-8.5 per stick, while cigarettes in the mass segment (less than 65 mm) will be levied Rs 2.05-2.1 per stick. Additionally, GST applicable on the final price will increase to 40 per cent. 

 

Though the duty hikes are lower in the mass segment (accounting for 40-45 per cent of the volumes), players are expected to partially absorb the same owing to the highly price-sensitive nature of this category.

 

Consequently, earnings before interest and taxes (EBIT) margin is likely to see a 200-300 basis point decline but still remain healthy, Crisil said. “This, coupled with robust liquidity of players and negligible debt, will help the companies sustain their credit profiles.”

 

Crisil’s analysis is based on three major cigarette players, accounting for over 95 per cent of the organised industry volume.

 

Shounak Chakravarty, director, Crisil Ratings, said: “While the mid to premium segment will see higher duty hikes, amounting to 25 per cent of current maximum retail price (MRP), manufacturers are expected to pass on the impact majorly to end users as consumers in this segment exhibit higher loyalty to specialised offerings, such as low nicotine variants and specialised flavours.”

 

On the other hand, duty hikes in the price-sensitive mass segment will be lower at 15 per cent of the current MRP, and manufacturers are likely to partially absorb the same to minimise volume degrowth, Chakravarty said.

 

He, however, added that the overall segment’s volumes might get impacted by 6-8 per cent next fiscal, in line with the impact seen during earlier duty hikes.

 

Between fiscal 2014 and 2018, a string of duty hikes on cigarettes had resulted in a cumulative 40-50 per cent increase in their MRP, which, in turn, led to a 20 per cent volume decline, Crisil noted. Manufacturers were able to recoup the lost volumes only over 3-4 years.

 

Hence, this time, brands are expected to be more calibrated in passing on the entire duty hike, especially in the price-sensitive mass segment, according to Crisil.

 

The overall impact of price absorption on the industry’s EBIT margins will be restricted to 200-300 basis points, Crisil expects, while players having a higher share in the mass segment will feel a deeper pinch.

 

However, EBIT margins are still expected to remain strong at over 58 per cent next fiscal, Crisil said. “Also, manufacturers have adequate financial flexibility for continued product innovation, aided by debt-free balance sheets and cash surplus of more than Rs 20,000 crore,” it added.