Cigarette Industry Prepares for Volume Decline Amid Tax Hikes

Crisil Ratings forecasts a 6-8% reduction in cigarette volumes next fiscal due to increased excise duties and GST rates. Premium and mass segments will experience different impacts, with manufacturers adopting varied strategies. Despite expected volume declines, the industry remains financially robust with strong EBIT margins and liquidity.

The domestic cigarette industry is bracing for a 6-8% slump in sales volume in the next fiscal year, according to Crisil Ratings. This projection follows the government's decision to raise excise duties and increase GST rates as of February 1.

Under the newly implemented tax structure, the compensation cess will be scrapped, and an added excise charge ranging from Rs 2.05 to Rs 8.5 per cigarette will be imposed depending on the cigarette's length. The GST on the final sale price will rise to 40%. Different segments of the market will feel the tax changes differently.

Shounak Chakravarty, Director at Crisil Ratings, highlighted how manufacturers are expected to cope: premium segments will see consumers absorbing most of the cost hikes, while the price-sensitive mass segment will have manufacturers sharing the burden to prevent a steep decline in sales. Despite anticipated volume drops, the industry's core financial health is set to remain stable, with strong EBIT margins and good liquidity backed by a cash surplus and negligible debt.

(With inputs from agencies.)