Cigarette volume rebound to pre-pandemic levels unlikely this fiscal: Crisil

Mumbai (Maharashtra) [India], August 5 : After declining 13 to 15 per cent last fiscal, cigarette sales volume is set to rise 7 to 9 per cent to 83 to 85 billion sticks this fiscal, driven by recovery in out-of-home consumption, limited price hikes and a lower-base effect.

But that will not be enough to lift the volume to pre-pandemic levels of 90 billion sticks seen in fiscal 2020 as the second wave of Covid-19 infections has moderated demand recovery, according to Crisil Ratings.
That is because hotel, restaurant and cafe (Horeca) and workplace segments which drive out-of-home consumption are unlikely to recover to pre-pandemic levels in current fiscal.

Nevertheless, higher revenues and volumes, healthy operating profitability and strong balance sheets will ensure healthy credit profiles of cigarette manufacturers, shows an analysis of four Crisil-rated ones accounting for 90 per cent of the industry's volume.

The Rs 25,000 crore organised domestic cigarette sector comprises premium king-sized (84 mm and longer) and regular (69 mm) and mini (64 mm and below) segments.
Before the pandemic, the regular and mini segments contributed 40 per cent and 43 per cent respectively while the premium segment contributed 17 per cent to the overall volume.
However, the pandemic had a greater impact on volumes of premium king-sized cigarettes, likely owing to down-trading caused by affected income levels and higher prices resulting from steep excise duty hikes in the Union Budget 2020.

Crisil said the overall impact on sales volume this fiscal will be less severe because personal mobility and manufacturing and distribution activities have not been as affected as in the first wave.
Additionally, with no hike in taxes on cigarettes in the Union Budget for this fiscal, prices are unchanged which should support volume recovery, and drive revenue growth.

Last fiscal, volume was hit in the first half due to the lockdowns which also curbed socialising. Closure of offices and curbs on manpower at workplaces for most of last fiscal hit consumption the hardest.
Despite this, revenue de-grew only 5 to 7 per cent because manufacturers passed on most of the 13 per cent hike in excise duty introduced in Union Budget 2020.

Gautam Shahi, Director at Crisil Ratings, said overall cigarette sales volume rebounded strongly to 95 per cent of the pre-pandemic level in the fourth quarter of last fiscal due to a return to near-normal situation. Then
came the second wave which is estimated to have reduced sales volume sequentially by 10 per cent in the first quarter of this fiscal.
"Despite this, volume should end up higher this fiscal (on-year) with workplace, retail and recreation mobility already improving to 63 per cent of the pre-pandemic level in April to July versus 44 per cent in the same period last fiscal," said Shahi.

Domestic cigarette manufacturers enjoy strong operating margins of 40 per cent, resulting in strong cash flows.
Thus despite moderately lower revenues and lower contribution from the premium segment, cost-cutting initiatives have limited the decline in margins last fiscal.
As revenues improve this fiscal, operating margins are likely to be stable despite better operating leverage as expenditure on promotions will spring back to pre-pandemic levels.

Crisil said the key monitorables in the road ahead are fresh waves of Covid-19 impacting demand and supply for the remainder of this fiscal, stability of tax regime, and regulations around tobacco consumption.