DEEP DRAG

India’s love for cigarettes is going up in smoke

Quartz india
Quartz india

Indians are kicking the butt.

Cigarette sales volumes in Asia’s third-largest economy dropped to a 15-year low of 88.1 billion sticks in 2015, down 8.2% from the previous year, research agency Euromonitor said in a report released on June 27.

Much of the decline is due to heavy taxation and renewed efforts by authorities to curb tobacco product sales.

In the budget 2016, announced in February, the government hiked excise duty on cigarettes for the fifth consecutive year—this time by another 10%. Besides, India’s health ministry made it mandatory in April for all cigarette packets to carry larger graphic health warnings. A million Indians die every year due to tobacco-related ailments.

But here’s the oddity: ITC, the country’s largest tobacco company, continues to rake in the moolah.

The breakup hurts

It’s not that ITC hasn’t felt the pain.

Most large companies operating in India’s Rs66,430-crore tobacco products industry are under pressure.

Revenues “remained subdued during the year due to unprecedented pressure on the legal cigarette industry in India because of steep increase in taxation and intense regulatory pressures,” ITC said in its annual report (pdf) for the financial year 2016. Cigarettes brought in over 40% of the company’s total revenue, with the rest coming from other businesses such as food, personal care, paper mills, and hotels.

Godfrey Philips, another large tobacco products maker, is also hurting. “The domestic cigarette industry continues to reel under the pressure of increased indirect taxes,” the company said in its annual report (pdf), citing a decline in volumes and a 4.2% growth in revenue in 2014-15.

ITC, however, has found a way out of the woods—with a 4.1% increase in net sales of cigarettes—through a calibrated strategy of price hikes.

“…ITC has only increased prices by 13% at the premium end of its portfolio, translating into a weighted average price hike of 7.6%, the lowest in four years,” brokerage Nomura said on June 21. “This makes us optimistic of a boost in volumes for the company this year, after a constant decline over the past two years.”

Demand and pricing, though, aren’t the only challenges in India. Between 2014 and 2015, according to Euromonitor, the share of illegal cigarettes has risen from 19.2% of overall sales to 21.3%. That makes India the world’s fourth-largest illicit trader of cigarettes.

But thankfully, India is smoking less nowadays.

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