Indian Cigarette Manufacturers Set for 9-10% Revenue Growth: CRISIL Report India is the second-largest tobacco producer, with leaf tobacco exports expected to rise from an average of 2.4 lakh tonnes over the past three years to 2.8-2.9 lakh tonnes this fiscal.

Indian cigarette manufacturers are eyeing a solid 9-10 per cent revenue growth in the current fiscal year, closely following last fiscal's 10 per cent growth, according to a recent CRISIL Ratings report. This uptick is attributed to a focused expansion in the mid-premium cigarette category and a strong boost in leaf tobacco exports, despite a modest domestic volume increase of just 3-4 per cent. The industry's resilience is bolstered by a stable tax regime and innovative offerings within the cigarette segment, which makes up around 90 per cent of the sector's total revenue. Meanwhile, constrained tobacco supply from key producers like Brazil, Zimbabwe, and Indonesia is set to drive up India's leaf tobacco exports, which currently account for 10 per cent of cigarette manufacturers' overall revenue.

"Indian cigarette companies will look to grow revenue in two ways this fiscal—strategizing to expand the product offerings in the mid-premium cigarette segment and seizing the opportunity for leaf tobacco exports," said Mohit Makhija, senior director at CRISIL Ratings. "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 approximately 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."

Global conditions have fueled this opportunity. A 10-15 per cent production drop in Brazil, Zimbabwe, and Indonesia, alongside export restrictions from China—responsible for over a third of global leaf tobacco—has tightened global supply. India, the second-largest tobacco producer, stands ready to meet this gap, with leaf tobacco exports expected to rise from an average of 2.4 lakh tonnes over the past three years to 2.8-2.9 lakh tonnes this fiscal.

However, rising tobacco costs present challenges. Raw tobacco prices, making up 50-55 per cent of manufacturing costs, are projected to increase by 15-18 per cent this fiscal, following a similar hike last year. Despite this, improving product mixes are likely to limit operating margin reductions to 100-150 basis points, maintaining EBIT (earnings before interest and taxes) margins at 62-63 per cent compared to last year's 64 per cent.

"Despite the unabated rise in raw tobacco prices, improving realisations owing to the rising share of the mid-premium segment will keep the EBIT margin for cigarette companies healthy," stated Shounak Chakravarty, director, CRISIL Ratings. "Also, the credit profiles of cigarette makers rated by us will be resilient, supported by negligible debt and robust liquidity (about INR 24,000 crore as on March 31, 2024)."

As the industry advances, stability in tax policy and tobacco regulations remain crucial for sustaining growth momentum in the coming years.