Cigarette manufacturers are aiming to record a revenue growth of 9-10 per cent this fiscal, in line with 10 per cent posted during the last financial year, stated a report by CRISIL Ratings. This, it added, will be driven by expansion in share of the mid-premium cigarette category and a sharp growth in exports of leaf tobacco. The revenue growth assumes significance in the context of a meagre 3-4 per cent domestic volume growth.
CRISIL said that a stable tax regime and new offerings will support growth in the cigarette segment (~90 per cent of overall revenue), while lower tobacco output in key manufacturing countries will push up sales of leaf tobacco (10 per cent of overall revenue), which is primarily exported.
Meanwhile, per analysis by CRISIL, high tobacco prices and the rising share of low margin leaf tobacco will weigh on operating margins. However, it added that a healthy product mix may help restrict the margin compression to 100-150 bps, albeit from a high base exceeding 60 per cent.
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Sustained strong balance sheets and ample liquidity will keep credit profiles of cigarette makers healthy.
CRISIL Ratings analysed the cigarette manufacturers rated by it, which account for over 90 per cent of the organised segment’s sales volume (~112 billion sticks of cigarettes sold in fiscal 2024), to report the conclusions.
Mohit Makhija, Senior Director, CRISIL Ratings, said, “Indian cigarette companies will look to grow revenue in two ways this fiscal — strategising to expand the product offerings in the mid-premium cigarette segment and seizing the opportunity for leaf tobacco exports. Innovative product offerings with new flavours and additives will drive the share of the mid-premium segment to 55 per cent this fiscal from 53 per cent last fiscal. This segment is expected to drive 6-7 per cent revenue growth for cigarette companies. Leaf tobacco export growth of ~30 per cent will also provide a leg up to cigarette companies to close in on overall revenue growth of 9-10 per cent this fiscal.”
Tobacco production in Brazil, Zimbabwe and Indonesia, which together account for around a fifth of the global tobacco output, declined by 10-15 per cent due to drought and untimely rainfall in these areas. Curiously, China — the largest consumer of leaf tobacco as well as the largest producer accounting for slightly more than a third of the global output — has also imposed restrictions on tobacco exports.
Now this gives India, the second largest tobacco producer, an opportunity to capitalise on the global shortage. CRISIL said that the country’s leaf tobacco exports are projected to rise to 2.8-2.9 lakh tonne this fiscal from 2.4 lakh tonne on average in the past three years.
However, the global shortage will drive up the prices of raw tobacco (50-55 per cent of manufacturing cost) for cigarette companies by 15-18 per cent this fiscal. This follows a price rise of 17-18 per cent last fiscal.
Shounak Chakravarty, Director, CRISIL Ratings, said, “Despite the unabated rise in raw tobacco prices, improving realisations owing to rising share of the mid-premium segment, will keep the EBIT (earnings before interest and taxes) margin for cigarette companies healthy at 62-63 per cent this fiscal compared with ~64 per cent last fiscal. Also, the credit profiles of cigarette makers rated by us will be resilient, supported by negligible debt and robust liquidity (about Rs 24,000 crore as on March 31, 2024).”
Going forward, stability in the tax regime and regulations on tobacco consumption will be monitorable, CRISIL said.
From: financialexpress
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