Cigarette Industry Faces Volume Contraction Amid Tax Hikes

The domestic cigarette industry is expected to experience a 6-8% contraction in volume due to new excise duties and increased GST rates starting February 1. Crisil Ratings predicts manufacturers will pass on cost hikes largely to consumers in the premium segment, aiming to mitigate volume losses in the mass segment.

The domestic cigarette industry is preparing for a sharp 6-8% volume decline in the next fiscal year, driven by the imposition of higher excise duties and an increase in GST rates from February 1, according to Crisil Ratings.

Currently, cigarettes face a 28% GST along with a compensation cess, but the removal of the latter will see the introduction of additional excise duties ranging from Rs 2.05 to Rs 8.5 per stick, varying with cigarette length. Mid to premium cigarettes will incur higher excise charges as manufacturers are poised to distribute the cost increase to customers, while in the sensitive mass segment, manufacturers may absorb some of the cost to reduce volume shrinkage.

Crisil's analysis of major industry players revealed that although EBIT margins might face a 200-300 basis point hit, robust liquidity and negligible debt will sustain their credit profiles. Despite the expected contraction, the sector remains financially resilient, focusing on product innovation fueled by strong cash reserves.

(With inputs from agencies.)