Are higher cigarette taxes starting to hurt ITC and other tobacco companies?

New Delhi: The government's steep increase in taxes on cigarettes and other tobacco products has begun to weigh on India's leading cigarette manufacturers, with market leaders ITC, Godfrey Phillips India and VST Industries reporting weaker underlying revenues, lower sales volumes and a decline in profitability during the April-June quarter.

The three companies account for more than 90 per cent of India's cigarette market, which is estimated to sell over 100-120 billion cigarettes annually.

The impact follows the government's decision in February to overhaul the taxation structure for tobacco products. The Goods and Services Tax (GST) was raised to a flat 40 per cent, while the compensation cess was replaced with an additional excise duty ranging from Rs 2,100 to Rs 8,500 per 1,000 cigarettes, depending on their length.

Although the higher tax component boosted reported revenues, companies said their underlying earnings came under pressure as demand weakened following significant price increases.

Market leader ITC reported a 73.7 per cent rise in cigarette business revenue from operations to Rs 16,596.67 crore during the June quarter, compared with Rs 9,553.86 crore a year earlier. The company attributed the increase to its staggered pricing strategy following the tax revision.

However, its gross revenue from cigarette sales, which excludes taxes and better reflects underlying business performance, fell 31.5 per cent year-on-year to Rs 3,769.11 crore, indicating a sharp decline in sales volumes.

ITC said it had adopted a "strategic and calibrated response" to the unprecedented tax increase while balancing the interests of consumers, trade partners and shareholders.

Godfrey Phillips India also reported a sharp fall in profitability. Its consolidated net profit declined 44.3 per cent to Rs 198.39 crore during the quarter. While revenue from operations almost doubled to Rs 3,819.56 crore because of the higher excise duty component, the company's net revenue, excluding excise, fell 18.8 per cent to Rs 1,206 crore.

VST Industries witnessed a similar trend. Revenue from operations nearly doubled to Rs 881.49 crore, but profit after tax dropped 24.4 per cent to Rs 42.42 crore. Its net revenue declined 13.5 per cent to Rs 256 crore, while average monthly cigarette volumes fell 14 per cent year-on-year to 611 million sticks.

The revised tax regime came into effect on February 1, replacing the earlier structure of 28 per cent GST along with compensation cess, which had been in place since the introduction of GST in 2017.

Following the tax changes, cigarette prices increased by around Rs 22-25 per pack of 10 cigarettes across several categories. Manufacturers responded with phased price hikes and adjustments to their product portfolios, but the latest quarterly results suggest the higher prices have dampened demand and affected profitability across the industry.

(PTI)