New Delhi [India], January 28 : Crisil Ratings reports that the domestic cigarette industry is preparing for a 6-8 per cent volume reduction in the next fiscal year. This follows the imposition of additional excise duties and an increase in GST rates, which are effective February 1. Under the new tax structure, 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 cigarette length. Furthermore, the GST applicable to the final price of cigarettes will increase to 40 per cent.
The tax changes will impact different market segments in varying ways. Mid to premium cigarettes, which are longer than 65 mm, will face excise duties between Rs 3.6 and Rs 8.5 per stick. For the mass segment, consisting of cigarettes shorter than 65 mm, the duty will be between Rs 2.05 and Rs 2.1 per stick. While the mass segment accounts for 40-45 per cent of industry volumes, manufacturers are expected to partially absorb the tax hike in this category because consumers are highly sensitive to price changes.
Shounak Chakravarty, Director at Crisil Ratings, noted the differing strategies manufacturers will likely use for these segments. "While the mid to premium segment will see higher duty hikes, amounting to ~25% of the current maximum retail price (MRP), manufacturers are expected to pass on the impact majorly to the 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% of the current MRP, and manufacturers are likely to partially absorb the same to minimise volume de-growth. That said, overall segment volumes might get impacted by 6-8% next fiscal in line with the impact seen during earlier duty hikes."
Despite the projected volume decline, the industry's financial health is expected to remain stable. EBIT margins are likely to decrease by 200-300 basis points but should remain strong at over 58 per cent next fiscal. Crisil Ratings indicates that the credit profiles of major players will be supported by robust liquidity and negligible debt. The organised cigarette industry, which represents 10 per cent of total tobacco consumption in India, currently maintains a cash surplus of more than Rs 20,000 crore.
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