This report profiles India’s tobacco industry, discussing market trends through 2013 and outlook for 2014 and beyond. The report also highlights leading players in the sector including ITC Ltd, Godfrey Phillips India Ltd and VST Industries Ltd.

Tobacco is one of the major commercial crops in India. In spite of the health hazards associated with it, the tobacco industry contributes significantly to the economy in terms of employment, income and government revenue. It was the second largest sector in terms of central excise revenue contribution after the oil and gas sector. The industry also acts as a major foreign exchange earner for the government. Besides tobacco farming and production, the Indian tobacco industry also comprises companies involved in manufacturing, sales and distribution of tobacco products like cigarettes, cigars, beedis and chewing tobacco.

FY14 was a challenging year for the Indian tobacco industry. The increase in excise duty induced pressure on the sales volume of cigarette companies. The tobacco production index saw a modest growth in FY14, recovering from a contraction witnessed in the last fiscal year. However, price hikes by cigarette manufacturers in the second half of the year resulted in an improvement of the profit margins despite a lower sales volume.

Historically in the cigarette segment, sales volume decline due to price hikes has always been temporary and has recovered within a short-time span. The trend is expected to continue this round and cigarette manufacturers are expected to show better revenue and profit growth in FY15. However, the consistent rise in excise duty and regulatory restrictions are the biggest challenges for the sector.

Key Points:

• During 2010-13, the central excise revenues from tobacco products grew at a CAGR of 21%. However, in 11MFY14, the excise revenues declined by 10.5% year on year due to a fall in production.

• During 2007-2010, the value of tobacco exports grew rapidly at a CAGR of 35%. Thereafter, it witnessed a period of contraction followed by a double digit growth again in the last two years.

• The area under tobacco cultivation grew at a CAGR of 5% during 2007-2012. The increase in area under cultivation was accompanied by an increase in tobacco production, growing at CAGR of 12% during the same period.

• The index of industrial production declined by 0.1% y/y in FY2014. During 2007-2013, the production index for tobacco products grew at a CAGR of 1%. In FY14, it witnessed a growth of 1.6%. Thus, tobacco manufacturing outperformed the overall index during FY14. However, it was much lower than the growth witnessed in FY12.